[2020] KEHC 3514 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERCIAL & TAX DIVISION

CIVIL CASE NO. 366 OF 2001

TRUST BANK LIMITED................................................................................PLAINTIFF

VERSUS

MIDCO INTERNATIONAL (K) LIMITED.......................................1ST DEFENDANT

CIEM INVESTMENTS LIMITED.....................................................2ND DEFENDANT

PIYUSH MANUBHAI PATEL............................................................3RD DEFENDANT

PANKANJ VRAJLAL SOMAIA.......................................................4TH DEFENDANT

AJAY SHAH..........................................................................................5TH DEFENDANT

JUDGMENT

1. By way of the Plaint dated 12th March 2001 and filed in court on the same date TRUST BANK LIMITED prayed for judgment against the Defendants jointly and severally for:-

a. Kshs.165,398,567. 00

b. Compound interest on the said sums at the rate of 25% p.a from 1st February 2001 until payment in full.

c. General damages for fraud and interest therein.

d. Costs and interest therein.

2. The suit was opposed by all the Defendants MIDCO INTERNATIONAL (K) LTD (the 1st Defendant) and PANKAJ VRAJLAL SOMAIA (the 4th Defendant) filed their Statement of Defence dated 12th April 2001. PIYUSH MANUBHAI PATEL (the 3rd Defendant) filed his Statement of Defence on 4th April 2001whilst AJAY SHAH (the 5th Defendant) filed a Defence dated 12th April 2001.

3. On 2nd May 2019 MR OYATSI Counsel for the Plaintiff informed the Court that they were withdrawing the Plaintiffs claim as against PIYUSH MANUBHAI PATEL the 3rd Defendant. This was because the said 3rd Defendant could not be traced as his whereabouts were unknown and the firm of KATIKU ADVOCATES who had been representing the 3rd Defendant had been dissolved. I therefore mark the suit against the 3rd Defendant as withdrawn.

4. Although this suit was filed way back in the year 2001, the actual hearing did not commence until May 2019 a full eighteen (18) years after the suit had been filed. The Plaintiff called one witness in support of their case and out of the four (4) Defendants only the 5th Defendant testified in Court.

THE EVIDENCE

5. PW1 MICAH LEKEUWAN NABORI told the court that he was a liquidation agent for the Plaintiff Bank appointed on 4th July 2013. He testifies that Trust Bank was placed in liquidation the year 2001, and that there had been several other liquidation agents prior to his appointment. PW1 relied entirely upon his witness statement dated 30th March 2017. PW1 told the court that although he did not participate in the events relating to the transaction which form the subject matter of this suit, he based his evidence on his perusal of the relevant documents and records obtained from the Bank.

6. PW1 states that the 1st Defendant was a customer of the Bank and that the Directors of the 1st Defendant at the material time were also the Directors of the 2nd Defendant, being the 3rd and 4th Defendants. PW1 told the court that from his perusal of the documents held at the Bank he was able to establish that the 1st Defendant had an outstanding facility with the Plaintiff Bank. The witness referred to a letter dated 6th October 1998, by which the then Statutory manager wrote to the 2nd Defendant demanding payment of an outstanding sum of Kshs.90,808,979. 00.

7. PW1 testified that on 1st October 1997 the Chief Manager of the Banks Moi Avenue Branch and his assistant wrote an internal memo confirming that the 5th Defendant (who at the material time was the Chairman of Trust Bank) had given verbal instructions that a sum of Kshs.65,682,790 be transferred from the account of the 2nd Defendant Ciem Investments Ltd so as to settle the liabilities of the 1st Defendant Midco International (K) Ltd leaving a balance of Kshs.4. 7 million in the account of the 1st Defendant.

8. That the amount of Kshs.65,682,790 which was credited into the account of the 2nd Defendant was actually an overdraft facility granted to the 2nd Defendant by Trust Bank Ltd. This loan to the 2nd Defendant was unsecured. The transfer of the funds from the account of the 2nd Defendants to the 1st Defendant account left a liability of Kshs.1,369,849. 74 outstanding on the account of the 1st Defendant and left the account of the 2nd Defendant overdrawn to the tune of Kshs.346,885,655. 81

9. PW1alleges that the account opened in the name of the 2nd Defendant was a deliberate act and that account was designed to be a special purpose account to be used to credit funds from the Plaintiff Bank which funds would then be transferred to the account of the 1st Defendant in order to offset its liabilities. That the sum of Kshs.65,682,700 which was credited into the 2nd Defendants account was actually the plaintiffs money and that this whole transaction was conducted without the 2nd Defendant having made any written application for a loan facility as required by law.

10. PW1contends therefore that the opening of an account for the 2nd Defendant and the alleged book entries in the accounts of the 1st and 2nd Defendants were designed to and did in fact facilitate or perpetuate a fraud against the Plaintiff Bank creating the false impression that the 1st Defendant had cleared its liabilities with the Bank thereby releasing the 1st, 3rd and 4th Defendants from their obligations to the Bank.

11. He states that the 2nd Defendant did not pay off its debt to the bank and instead the company was dissolved. PW1 claims that the 1st Defendant owes the Plaintiff Kshs.1,369,849,74 whilst the 2nd Defendant has a liability of Kshs.346,8885,655. 81 with Trust Bank. That Trust Bank was placed under statutory management in August 1998 and upon discovering this fraud the liquidator decided to file this suit in order to recover the monies owed to the Bank.

12. DW1 AJAY SHAH told court that at the material time he was the Executive Chairman of Trust Bank Limited. He denies all the allegations of fraud and maintains that all the transactions conducted under his watch accorded with the law and that proper banking practices were at all times adhered to.

13. DW1 denies having participated in the obtaining of the overdraft facility by the 2nd Defendant as he was not involved in day to day running of the Banks affairs. He states that the entire transaction was processed at the Branch level and was duly approved by the Credit and Executive Management Committee (hereinafter “CEMC”) of which committee DW1 was not a member. DW1 states that once the liquidator took over at the Plaintiff Bank, he actively assisted in the recovery of debts owed to the Bank which he states is evidence of his good will. According to DW1the proper party who the Plaintiff ought to have pursued for this debt was the party who had obtained the credit facility in question being the 2nd Defendant. DW1 further states that the 2nd Defendant offered to assign to the Plaintiff Bank fixed deposits worth Kshs.100 million, shares in City Bank, or any other alternative security in full settlement of its debt but the Plaintiff declined the offer. Finally, the 5th Defendant prays that the suit against him be dismissed with costs.

14. The 4th Defendant decided not to call any evidence in the case. Upon the conclusion of oral evidence parties were invited to file their written submissions. The Plaintiff filed its written submissions on 10th May 2019 the 4th Defendant filed his written submissions on 12th June 2019 and the 5th Defendant filed his submissions on 8th July 2019. The Plaintiff then filed submissions in reply to the 5th defendant’s submissions on 10th July 2019.

ANALYSIS AND DETERMINATION

15. I have carefully considered the evidence on record as well as the written submissions filed in this matter and the relevant law. It is trite law that the burden of proof in law lies with the party who asserts the existence of a particular fact or set of facts. Section 107 or set of facts. Section 107 of the Evidence Act provides as follows:-

“107 Burden of proof

1. Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts he must prove that those facts exist.

(b) When a person is bound to prove the existence of any fact to is said that the burden of proof lies on that person.”

16. In Gichinga Kibutha V Caroline Nduku [2018] eKLR, the Court stated:-

“It is, therefore, settled law that in civil cases, a party who wishes the court to give a judgment or to declare any legal right dependent on a particular fact or sets of facts, that party has a legal obligation to provide evidence that will best facilitate the proof of the existence of those facts. The party must present to the court all the evidence reasonably available on a litigated factual issue.”

17. It is alleged that the Defendant deliberately participated a fraud against the Plaintiff Bank. The Particulars of the fraud are set out at Paragraph 15 of the Plaint dated 12th March 2001 as follows;-

PARTICULARS OF FRAUD

(a) Opening or causing the Second Defendant to open an account with the Plaintiff to facilitate commission of a fraud upon the Plaintiff.

(b) Causing the said false book entries to be made in the accounts of the First and Second Defendants.

(c) Making or causing the said false book entries to reflect payment to the Plaintiff of the sum of Kshs.65,682,790/= when they knew that no payment had been made.

(d) Making or causing the said book entries to be made so as to discharge the First, Third and Forth Defendants from their liability to pay the Plaintiff the said debt and when they knew or ought to have known that the said Defendants had not discharged their obligations to the Plaintiff.

(e) As for the Fifth Defendant, purporting to grant overdraft facilities to the Second Defendant without any request for such facility from the said Defendant.

(f) Deliberately flouting the provisions of the Banking Act.

(g Cheating the Plaintiff out of the said funds.

18. The Plaintiff alleges that the Defendants acted fraudulently in causing an account to be opened in the name of the 2nd Defendant, by causing false entries to be made in the accounts of the 1st and 2nd Defendants and by falsifying book entries to reflect a payment of Kshs.65,682,790 to the Plaintiff. Further the Plaintiff contends that the money used to clear the 1st Defendants loan was money fraudulently obtained from the Plaintiff Bank itself. As such the only issue that arises for determination in the case is whether the Defendants acted fraudulently in respect of this particular transaction as alleged.

19. BLACKS LAW DICTIONARYEDITION defines “Fraud” in the following terms:-

“Fraud consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury. As distinguished from negligence, it is always positive, intentional. As applied to contracts, it is the cause of an error bearing on a material part of the contract, created or continued by artifice, with design to obtain some unjust advantage to the one party, or to cause an inconvenience or loss to the other. Fraud, in the sense of a Court of equity, properly includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another.”

20. In the case ofDavy V Garrett (1878) 7 ch.D.473 at 489, it was stated as follows:-

“Where fraud is intended to be charged, there must be a clear and distinct allegation of fraud upon the pleadings, and though it is not necessary that the word fraud should be used, the facts must be so stated as to show distinctly that fraud is charged. The statement of claim must contain precise and full allegations of facts and circumstances leading to the reasonable inference that the fraud was the case of the loss complained of …..It is not allowable to leave fraud to be inferred from the facts pleaded and accordingly, fraudulent conduct must be distinctly alleged and as distinctly proved. “General allegations, however strong may be the words in which they are stated, are insufficient to amount to an averment of fraud of which any court ought to take notice.”[own emphasis]

21. Briefly the allegations of fraudulent conduct made by the Plaintiff, against each of the Defendants were as follows:-

(a) MIDCO INTERNATIONAL (K) LTD

The 1st Defendant who prior to September 1997 was customer of the Plaintiff Bank owed the Bank the sum of Kshs.75,28,284. 00 in respect of an overdraft facility. It is alleged that the 1st Defendant schemed with the other Defendants to defraud the Plaintiff Bank of the amount of Kshs.65,682,790. 00by causing an account to be opened in the name of the 2nd Defendant

(b) 2nd Defendant –Ciem Investment Limited

The accusation against the 2nd Defendant is that together with 5th Defendant it deliberately opened an account with the Plaintiff solely for the purpose of obtaining an overdraft facility of Kshs.65,682,790. 00. That the amount of this overdraft facility was then credited into the account of the 1st Defendant in order to clear the liability of the 1st Defendant to the Plaintiff Bank.

(c) 4th Defendant – Pankaj Vrajlal Somaia

It is alleged that the 4th Defendant who was said to be a Director of the 2nd Defendant schemed with the other Defendants to perpetrate the fraud through the account opened in the name of the 2nd Defendant. It is claimed that the 4th Defendant caused books of entries to be made so as to discharge himself from liability to the Plaintiff.

(d) 5th Defendant – Ajay Shah

It is alleged that in his capacity as the Executive Chairman of the Plaintiff Bank, he conspired with the other Defendants to defraud the Plaintiff by granting to the 2nd Defendant the said overdraft facility of Kshs.65,682,790/=. That said facility was granted to the 2nd Defendant without any documentation to support it and without any valid security being offered by the 2nd Defendant. That the 5th Defendant disbursed the amount of the overdraft by debiting the account of the 2nd Defendant and crediting the entire amount into the account of the 1st Defendant. This money was never recovered by the Plaintiff because the 2nd Defendant did not repay the facility and the company was dissolved soon thereafter.

22. Fraud is an offence that largely requires proof of a person’s state of mind. To prove that an act has been done fraudulently requires that the court took into the state of mind of the perpetrator of said Act. In URMILA w/o MAHINDRA SHAH –VS- BARCLAYS BANK INTERNATIONAL & ANOTHER [1997] KLR court held that:-

“to establish fraud a higher standard of proof is required, approaching proof beyond reasonable doubt.”

23. The Plaintiffs have linked the 3rd and 4th Defendants to the alleged fraud because the two are said to have been Directors of the 2nd Defendant and presumably are deemed to have been involved in and stood to benefit from the fraudulent transactions. In his evidence PW1 confirmed that contrary to what had been asserted in the Plaint dated 12th March 2001, the 4th Defendant had not executed any personal guarantee to secure the debt owed by the 1st Defendant and no Guarantee signed by the 4th Defendant was produced by the Plaintiff as evidence in this case. Under cross-examination PW1states:-

“The 4th Defendant is sued on the basis of his personal guarantee. In my perusal of the Plaintiff’s files I have not come across any guarantee signed by the 4th Defendant. I have not annexed in our bundle of documents any guarantee signed by the 4th Defendant. There was no formal written guarantee but the 4th Defendant was a Director of the 2nd Defendant.”[own emphasis]

24. By this PW1 was evidently changing goal posts. Upon realization that the 4th Defendant in fact did not sign any personal guarantee, PW1 changes tact and claims that the 4th Defendant was sued in his capacity as a director of the 2nd Defendant. This allegation also falls flat. A Notification of change of Directors of CIEM INVESTMENTS LIMITED (the 2nd Defendant) Pexb4appearing at Page 3 of the Plaintiff’s Bundle of Documents filed on22nd September 2009reads as follows:-

“With effect from 26th MARCH 1997 AZIM VIRJEE and SAMVIR TRUSTEES LIMITED were appointed as directors of the Company.”

2 With effect from 26th March 1997 PIYUSH MANUBHAI PATEL and PANKAJ VRAJLAL SOMAIA [the 4th Defendant]resigned as Directors of the company

3………….”

25. From this it is clear that in October 1997 when the fraudulent transactions are alleged to have taken place the 3rd and 4th Defendants were no longer Directors of the 2nd Defendant Company. PW1 under cross-examination admits as follows:-

“As at 26/3/1997 the 4th Defendant ceased to be a director of the 2nd Defendant. The decisions of the 2nd Defendant made in September 1997 would have been reached by the new directors…”

These new directors were Azim Virjee and Samvir Trustees Ltd. It is they who had the mandate of the account of the 2nd Defendant at the time the alleged transgressions occurred. PW1 later suggests that the 4th Defendant was sued because he was one of the original directors of the 2nd Defendant. This proposition is laughable and cannot be taken seriously. It is manifest therefore that the Plaintiff erred in suing the 3rd and 4th Defendants in this suit. In any event no tangible evidence has been adduced to prove the direct involvement of the 3rd or 4th Defendants in the said transactions. No documents or memos signed by the two have been produced as evidence. In the circumstances neither the 3rd or 4th Defendant can be held liable for any fraud.

26. With respect to the 5th Defendant the allegation against him was that as the Executive Chairman of the Plaintiff Bank he gave verbal authorization for the account of the 2nd defendant to be debited with the sum of Kshs.65,682,790 and that the funds be credited into the account of the 1st Defendant to offset the latter’s liability to the Plaintiff bank.

27. The 5th Defendant concedes that he was the Executive Chairman of Trust Bank Limited at the material time. However the 5th Defendant states that he was not involved in the day to day running of the Bank activities and states further that authorization for such credit and debts was done by the Credit Executive Committee of which he was not a member. PW1confirmed in his evidence that this Committee is normally comprised of independent members of the Bank.

28. A look at the circulation sheet appearing at Page 7 of the Plaintiff’s Bundle of Documents filed on 22nd September 2009 Pexb8) shows that it contains proposals to the Executive Credit Committee. One Mr VL Aggrawal a Committee member remarked as follows:-

“Liability been credited on authorization of the Executive chairman and to be secured by pledge of shares submitted for confirmation…”

29. The comments of the Credit Control Department in the same document read as follows:-

“As per instructions of our executive chairman the branch has debited the account of CIEM INVESTMENTS with Kshs.65,682,790. 00 creating an OD [overdraft] and the funds credited to the account of Ms Midco International. We require details of the securities for the OD created Branch action may be confirmed submitted for our examination…”

The notes at the end of this circulation sheet reads:-

“The Branch is seeking confirmation herein and further instructions.”

The above would appear to support the contention that it was the 5th Defendant who as Executive chairman of the Bank authorized the transaction in question.

30. However Pexb10 (Page 9 of the Plaintiff’s Bundle) is a memo dated 17th October 1997 from the Banks main Branch to the Manager of the Moi Avenue Branch. The memo reads:-

“RE: CIEM INVESTMENTS LTD – OD KSHS.65,682,790. 00.

We refer to your memo Man/Adv/ 97/1442/so dated 01/10/97.

The ECC has confirmed your action of allowing an OD in above name subject to:

(a) Facility: OD-Kshs.65,682,790/=

(b) Security:

1) 25% of City Finance Shares

2) Credit Agreement

3) Board Resolution to borrow.

4) Personal Guarantee of Directors

(c) Others: Branch to obtain

i) Credit report

ii) Audited Accounts

iii) Personal Financial informa-tion on Directors

iv) Certificate of registration of the Company.

Sanction Ref: ECC 97/1217/ MAN/185

Please ensure that all relevant security documents covering the facility are obtained as per securities manual.

A checklist of security documents is to be completed and retained on the respective file. A copy of the same is to be sent to us for our records.”

31. The above Memo was signed by VL Agarwal the senior manager and F.D Liveha the Deputy Manager of Bank. The Memo implies that the Plaintiff Bank through its Senior Manager and Deputy Manager authorized the transaction in question that is why in the Memo the Bank was seeking security documents to cover the overdraft facility granted to the 2nd Defendant. In any event this Memo is indicative of the involvement of the Plaintiff Bank through its management in authorization of the suspect overdraft facility. This belies the assertion by the Plaintiff that the transaction was authorized solely by the verbal instructions of the 5th Defendant.

32. In compliance with the requirement that security be supplied for the overdraft facility the 2nd Defendant offered to assign its shares with City Finance Limited worth about Kshs.100 Million. However by its letter dated 6th August 1999at Page 13 of Plaintiff’s Bundle of Documents[Pexb 14] the Plaintiff rejected that assignment of shares. Why would the Plaintiff Bank decline a perfectly adequate security for the overdraft?

33. A demand letter dated 6th October 1998 was written to the 2nd Defendant (See page 10 of Plaintiff’s Bundle) Pexb11 which demand letter reads:-

RE: AMOUNT OWING TO THE BANK IN YOUR ACCOUNT NO.56502-01 KSHS.90,806,979=35

Pursuant to this Bank being placed under statutory management by the Central Bank of Kenya the contract between the bank and yourselves has come to an end and all advances to you are to be recalled immediately.

Consequently, we hereby demand from you the immediate payment of Kshs.90,806,979=35 being the amount due and payable by you as at 30th September 98 to the Bank in respect of advances made to you at your instance and request. This sum is accruing interest at the rate of 39% per annum until payment in full.

TAKE NOTICE that if the said sum of Kshs.90,806,979=35 together with interest thereon as aforesaid is not paid in full within seven (7) days from the date hereof, time being of the essence, we shall instruct our advocates to immediately institute legal proceedings against you for recovery thereof without further notice to you and at your risk as to all costs, expenses and other consequences arising from or incidental to such legal action.

TAKE FURTHER NOTICE that any payment or proposal for payment of part of the outstanding amount made, if accepted by the Bank shall be without prejudice to the Bank’s rights pursuant to this notice.

Yours faithfully”

[own emphasis]

34. This letter refers to a contract between the Bank and the 2nd Defendant. Further the letter indicates that the facility was granted to the 2nd Defendant “at your instance and request”.

35. If the 2nd Defendant requested the overdraft facility then there ought to have been documentation to support this e.g a letter from the 2nd Defendant applying for the overdraft facility and a letter of offer from the Plaintiff Bank. No such documents were produced as evidence in this case. This letter further implies that the Plaintiff Bank and its officers were fully involved in the grant of the overdraft facility to the 2nd Defendant which casts doubt on the theory that the facility was granted solely at the instance of the 5th Defendant.

Indeed PW1 under cross-examination by counsel for the 5th Defendant states that:-

“It was the Branch to action the facilitation of this OD facility. I do not know why the 5th Defendant was sued…’

36. PW1thereby confirms that the overdraft facility was approved and processed by the Plaintiff Bank. PW1 who was the Plaintiffs only witness admits that he does not know why the 5th Defendant was sued in these proceedings. PW1 went on to state that:-

“The overdraft granted to the 2nd Defendant was procedurally created but the Branch did not collect all the required documents…”[own emphasis]

PW1 here admits that the overdraft transaction was procedural. He blames the Branch for the failure to collect the requisite security documents. I fail to see how the 5th Defendant can be held liable for the failures of the Branch officials.

37. The 5th Defendant has been accused of verbally authorizing the debit of Kshs.65,682,790. 00 from the 2nd Defendant’s account and crediting this amount into the account of the 1st Defendant. There was no evidence tendered to prove that the 5th Defendant gave such verbal authorization. There is no evidence to prove that it was the 5th Defendant who himself made or directed to be made the relevant bank entries. There is no evidence from any witness who heard the 5th Defendant give such verbal authorization for the transaction and no witness was called to testify that they acted upon the verbal instructions of the 5th Defendant. The 5th Defendant was neither a Director or Shareholder of the 1st or 2nd Defendants who were involved in the said transactions.

38. The Plaintiff was a well-established Commercial Bank. It is highly unlikely that transactions involving such large sums of money would be processed on verbal instructions alone. Banks are known to keep meticulous records. One would expect there to have be supporting documentation for a transaction of this nature.

39. It is manifest that the Plaintiff has failed dismally to prove any of the allegations of fraud against the 5th Defendant. The Plaintiff only sued the 5th Defendant because he was the Executive Chairman of Trust Bank at the material time. It is common knowledge that a chairman of a Bank will not normally be involved with the day to day running of the Banks business. The overdraft facility to the 2nd Defendant was fully sanctioned by the Branch. Neither the Manager nor Deputy Manager of the Moi Avenue Branch testified in this matter to state whether or not the 5th Defendant directed them to sanction the transaction or to explain how and why they approved the overdraft facility to the 2nd Defendant. Accordingly, I find that there is no factual basis to the claims made by the Plaintiff against the 5th Defendant.

40. Lastly it is evident that the party who absconded with the Plaintiffs funds was the 2nd Defendant. It is curious why the Plaintiffs decided to sue the Defendants on these very tenuous allegations of fraud instead of simply suing the 2nd Defendant to recover the monies advanced to it as an overdraft facility.

41. Based on the above, I find that the Plaintiff has failed to prove on a balance of probability the fraud allegations against the Defendants. Accordingly, I dismiss the Plaintiff’s suit in its entirety and award costs to the 1st, 4th and 5th Defendants.

Dated at Nairobi this 7th day of July, 2020.

............................................

Justice Maureen A. Odero