Central banks take heat over actions on lenders as BoU loses Crane suit
Monday February 21 2022
Uganda's Crane Bank was put under statutory management by the regulator in 2016 following a damning audit report that revealed insufficient capital levels and gross mismanagement. PHOTO | FILE
East African central banks are coming into sharp focus over the manner in which they put troubled banks into receivership as their decisions continue to open up major legal battles.
Last week the Bank of Uganda (BoU) lost a long-running court case over the procedures it followed in placing troubled Crane Bank into receivership and subsequently selling its assets to DFCU Bank between 2016 and 2017.
Ruling
Uganda’s Supreme Court in a ruling delivered on February 11 upheld the decisions of the High Court and Court of Appeal and dismissed an appeal filed by BoU. The court ordered the banking regulator to return Crane Bank to its shareholders.
The regulator was also ordered to incur the full cost of the suit.
BoU, through Crane Bank Ltd (then in receivership), had sued Sudhir Ruparelia, a director and shareholder of Crane Bank and Meera Investments Ltd (MIL) after the billionaire businessman protested the manner of take over and sale of the bank’s assets.
BoU sought the recovery of money allegedly misappropriated by the director of the failed bank in 2017 and the delivery of freehold certificates of title to 48 properties with duly executed transfer deeds in its favour.
However, Mr Ruparelia and MIL denied the bank’s assertion and instead challenged the competency of the suit, arguing that Crane Bank did not have the locus standi to sue since it was still in receivership, that the suit did not disclose a cause of action and that it was generally barred in law.
As a result, BoU lost the case in the High Court and Court of Appeal before losing it again in the Supreme Court this month.
Crane Bank was placed under statutory management by Bank of Uganda in September 2016 following a damning audit report that revealed insufficient capital levels, shrinking liquidity ratios, surging loan default levels and gross mismanagement.
Four months later BoU transferred certain assets and customer deposits to DFCU Bank in a controversial transaction valued at Ush200 billion ($56 million) that was concluded in January 2017.
Ugandan Parliamentary investigations declared the transaction was marred with irregularities.
Kenya case
Kenya’s Central Bank is also facing a legal battle over the manner in which it handled the closure of troubled Imperial Bank, pushing thousands of depositors into financial distress.
The matter, which is certified as urgent by Justice Alfred Mabeya, is slated to be heard in May.
Central Bank boss Patrick Njoroge and his deputy Sheila M’Mbijiwe are set to be cross-examined by the court as key witnesses on the legality of their actions in placing the mid-tier lender into receivership six years ago.
The investigation is part of a suit filed by Imperial Bank against Janco Investment, a firm owned by the late Imperial Bank CEO Abdulmalek Janmohamed
Law firm Ahmednasir, Abdikadir and Company Advocates through court documents argues that the entire process of placing Imperial Bank under statutory management was unlawful and a conspiracy by the central bank governor and his deputy.
According to the law firm, Governor Njoroge was out of the country in Peru and the Central Bank did not have a board as the tenure of the directors had expired by the time Imperial Bank was being put into receivership on October 13, 2015.
“Consequently, in the absence of a board of directors at the material time, the governor of Central bank of Kenya, Dr Njoroge, was incapable of exercising its powers under the Banking Act of Kenya, Chapter 488 of the Laws of Kenya and the Central Bank Act of Kenya, chapter 491 of the Laws of Kenya,” the lawyers say.
“The plaintiff (Imperial Bank) was therefore placed under statutory management of Kenya Deposit Insurance Corporation (KDIC) on the unlawful orders/instructions of the deputy governor of the Central Bank of Kenya, Mrs Sheila M’Mbijiwe.”
It asserts that CBK proceeded to close down Imperial Bank despite the lender being in a solid financial position and having a healthy loan book, with no history of financial crisis.
“The evidence of the governor of Central Bank of Kenya Dr Njoroge and deputy governor Mrs M’Mbijiwe is indispensable in the fair hearing and determination of this suit,” the law firm says.
Imperial Bank was placed under receivership after the discovery of illegal and fraudulent activities by bank directors that resulted in the loss of an amount in excess of $312.5 million.
The lender collapsed with outstanding claims in excess of $758.92 million.
Questions over regulations
In June 2016, Kenya’s Senate questioned the regulations that were followed by CBK in placing Imperial Bank together with Dubai and Chase Bank under receivership.
In December 2021, the Kenya Deposit Insurance Corporation recommended liquidation of the bank on grounds that its finances were in a precarious position.
Imperial Bank depositors, through their lobby group, said they are disappointed by the way the receivership was handled and that the CBK governor failed to keep his promise of resurrecting the bank and ensuring that depositors’ funds are not lost.
Lobby group Consumers Federation of Kenya says CBK has not done enough on Imperial Bank and has kept the public and depositors in the dark concerning the state of affairs of the lender.
In July 2021, Kenya’s Parliamentary Committee on Finance and National Planning interrogated the Central Bank on why Imperial Bank’s forensic audit report by FTI Consulting has not been made public.