Ajay Shah v Deposit Protection Fund Board as Liquidator of Trust Bank Limited (In Liquidation) [2016] KECA 436 (KLR)
The bottom line
#Kenya's Court of Appeal threw out a Kshs 1.5 billion claim against two former bank directors because the liquidator waited too long to sue.
What this practically means
#Executive summary
#Key legal issues
#Limitation of actions against a liquidator's claim under Sections 323 and 324 of the Companies Act
The claim was time barred. The cause of action arose at the latest when the liquidator was appointed on 31st August 2001 and at the earliest on 16th September 1998; the suit filed on 23rd March 2010 was more than six years out of time.
Sections 323 and 324 create no new cause of action; they provide a summary remedy for rights already vested in the company. The Limitation of Actions Act is incorporated into the Companies Act by Section 31. Winding up confers capacity on the liquidator to sue in his own name but does not suspend limitation. The phrase 'in the course of winding up' does not exclude the Statute of Limitation, and a claim by the liquidator stands or falls with the company's underlying claim.
Nature of the director's duty and relevance of bank-customer relationship
Directors are not trustees of customers' deposits; the relationship between a bank and its customer is debtor/creditor. The claim under Sections 323 and 324 rests on the fiduciary duty of loyalty and good faith and duty of care and skill owed by directors to the company.
The trial court wrongly framed the claim around a trust relationship with depositors. Relying on Gower and English authorities, the court held directors are agents of the company standing in a fiduciary relationship with it; Foley v Hill, establishing the debtor-creditor nature of banking, was irrelevant to the issues. In insolvency, directors must consider creditors' interests paramount, but the duty is owed to the company.
Weight of the Scheme of Arrangement as an admission of liability
The Scheme of Arrangement carries little or no weight in establishing liability; the information in Appendix 11(d) was disproved by the liquidator's own reversals and direct credit payments, and the liquidator itself asserted that its claim was not founded on the Scheme.
A Scheme of Arrangement is a rescue plan to reconstruct a company while protecting creditors and shareholders; once the company went into liquidation, the Scheme collapsed. The directors' signature acknowledged only insider loans to be recovered with best endeavours, not personal liability. The proven inaccuracy of the figures in the Scheme undermined any presumption of accuracy and any inference of admission of indebtedness.
Proof of loss of Kshs. 241,442,375.80
The liquidator failed to prove on a balance of probability that Trust Bank lost the sum of Kshs. 241,442,375.80; the reversals of Kshs. 146,687,402.50 and direct payments of Kshs. 96,500,000/= extinguished the indebtedness of Trust Capital Services Limited.
The trial court failed to evaluate Exhibit DM3 disclosing the 24 unpaid bankers' cheques and three direct credits, evidence exculpatory of the directors. Liability for the loss was a factual question requiring proof; the court conflated breach of fiduciary duty with liability for the specific loss. The liquidator bore the legal and evidential burden of proving loss and did not discharge it.
Award of compound interest and 15% per annum interest
The trial court's award of compound interest at 15% per annum was arbitrary and not justifiable; interest on reversed and paid sums was not due and owing.
Section 324 permits interest at such rate as the court thinks just, but the trial court gave no explanation why compound interest or the 15% rate was just. Interest antecedent to suit must be pleaded and proved. The pleaded claim was for prevailing bank rates, which were never stated; the source of the 15% rate was unclear and no basis for compounding was established.
Legal principles established
#- Sections 323 and 324 of the Companies Act create no new cause of action; they provide only a summary remedy for rights already accrued to the company, so the ordinary limitation period applies and is not suspended by the winding up.
- Commencement of liquidation neither extends nor revives a limitation period; time runs from when the cause of action arose in favour of the company, not from the appointment of the liquidator.
- The relationship between a bank and its customer is one of debtor and creditor, not trust; but the issue in misfeasance proceedings under Sections 323 and 324 is the duty a director owes the company, and directors are agents of the company in a fiduciary relationship with it.
- A liquidator's claim under Section 323 or 324 is the company's own cause of action; the claimant remains the company and the claim does not have a limitation period distinct from the underlying claim.
- A party alleging discovery of concealed fraud must give a definite date or event from which computation of the limitation period starts.
- The legal and evidential burden rests on the liquidator to prove the company's loss; allegations of fraud require a high degree of probability, more than a mere balance of probabilities.
Court orders
#- 1.The appeal is allowed.
- 2.The ruling and order of the trial court dated 30th May 2013 and all consequential orders are set aside.
- 3.The appeal is allowed with costs in favour of the appellant and 2nd respondent.
- On appeal from
- High Court of Kenya at Nairobi (Milimani)
- H.C. MISC. C. APPL. No. 294 of 2010
- Jurisdiction invoked
- First appellate jurisdiction over an appeal from the High Court (ruling and decree dated 30th May 2013 in H.C. MISC. C. APPL. No. 294 of 2010); no specific constitutional or statutory provision for the appeal is cited in the judgment.
Key timeline
#Practical implications
#Frequently asked questions
#Later judgments citing this (1)
#Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.
- Pioneer Holdings (Africa) Ltd v Francis Thuo and Partners Ltd & 2 others (Civil Appeal 34 of 2018) [2019] KECA 711 (KLR)[2019] KECA 711 (KLR)24 May 2019followed
Cite this brief
#Cite this brief
Caselaw, "Ajay Shah v Deposit Protection Fund Board as Liquidator of Trust Bank Limited (In Liquidation) [2016] KECA 436 (KLR)", Case Analysis (2016). Civil Appeal No. 158 of 2013. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2016/436/eng@2016-06-17
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.