Kenya Airways Plc v Cabinet Secretary to The National Treasury, Equity Bank Kenya Limited, Co-operative Bank of Kenya Limited, Commercial Bank of Africa Limited, National Bank of Kenya, Kenya Commercial Bank Kenya Limited, Nic Bank Limited, Diamond Trust Bank Kenya, I & M Bank Limited, Eco Bank Kenya Limited, Chase Bank (Kenya) Limited In Receivership & Jamii Bora Bank Limited [2017] KEHC 9215 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERCIAL AND TAX DIVISION

MISCELLANEOUS SUIT NO. 321 OF 2017

KENYA AIRWAYS PLC……….............................................................................PETITONER

VERSUS

THE CABINET SECRETARY TO THE NATIONAL TREASURY.......…...1ST RESPONDENT

EQUITY BANK KENYA LIMITED……………………………...…….….2ND RESPONDENT

THE CO-OPERATIVE BANK OF KENYA LIMITED…………........……3RD RESPONDENT

COMMERCIAL BANK OF AFRICA LIMITED………….....………….…4TH RESPONDENT

NATIONAL BANK OF KENYA…………………………….………….…5TH RESPONDENT

KENYA COMMERCIAL BANK KENYA LIMITED…………....…….…..6TH RESPONDENT

NIC BANK LIMITED………………………………………………….…7TH RESPONDENT

DIAMOND TRUST BANK KENYA………………………………..……8TH RESPONDENT

I & M BANK LIMITED………………………………………………..…9TH RESPONDENT

ECO BANK KENYA LIMITED………………………………………...10TH RESPONDENT

CHASE BANK (KENYA) LIMITED

IN RECEIVERSHIP……………………………………….……………11TH RESPONDENT

JAMII BORA BANK LIMITED……………………...…………….……12TH RESPONDENT

RULING

1. This Ruling is in relation to 3 applications which were brought by the 2nd, the 10th and the 12th Respondents, namely EQUITY BANK (KENYA) LIMITED; ECOBANK KENYA LIMITED, and JAMII BORA BANK LIMITED.

2. The 3 banks brought their respective applications in response to the exparte orders which this court had made on 17th July 2017.

3. The primary order which was granted to the court was the authorization given to the petitioner, KENYA AIRWAYS PLC, to convene a meeting of the petitioner’s SCHEME CREDITORS on 1st August 2017.

4. The meeting was intended to bring together all the 12 respondents.

5. The intent and purpose of the meeting was deliberations and voting on the petitioner’s SCHEME PROPOSAL, in relation to the respondents.

6. Pursuant to the court order, the petitioner was to issue Notices to each of the respondents.

7. In anticipation of the meeting, the court appointed Mr. MBUVI NGUNZE as the chairman of the said meeting.  The court also ordered that if MBUVI NGUNZE was absent, the meeting would be chaired by Mr. RICHARD HARNEY Advocate.

8. The chairman of the meeting was ordered to file a Report on the outcome of the said meeting within 24 hours after the meeting was concluded.  The report was to be filed in court.

9. The court granted power and authority to the chairman to adjourn the meeting, whether before or at the meeting.  However, if the meeting were to be adjourned, the chairman was required to take all reasonable steps to notify the Scheme Creditors of the fact of the adjournment and of the new date and place of the meeting.

10. Bearing in mind that the order in issue had been made exparte, the court was mindful of the possibility that the respondents could possibly have issues to raise.  Therefore, the court granted to all the parties, and in particular the respondents, liberty to apply.

11. Finally, the court directed that these proceedings be conducted in camera.  The court further ordered that the parties would hold confidential, the existence of these proceedings; together with all pleadings, documents and exhibits.

12. And in order to ensure that confidentiality was achieved, the court ordered the press, in whichever guise or format to refrain from disseminating any information about the proceedings.  In other words, the press was barred from reporting anything about the case.

13. When the applicants became aware of the court orders, they decided to rush to court, in an endeavour to put on hold the intended Scheme Creditors Meeting.

14. The applicants also took issue with the choice of the chairman of the meeting.  It was their desire that, if the meeting were to proceed, it would be chaired by more independent persons, who should be appointed by the creditors.

15. Another concern raised by the applicants was that the structure by altered, because it otherwise lumped together unlikely bed-fellows.  The applicants expressed a desire to have a class of creditors constituted of the local regulated commercial lenders.

16. It is the considered view of the applicants that the Cabinet Secretary to the Treasury, (who is the representative of the Government of Kenya) ought not to be in the same class of creditors as the commercial lenders.

17. The applicants view is premised on the fact that the Government is the single largest shareholder in the petitioner.  Secondly, the Government was providing a guarantee to secure some of debts.  Therefore, the applicants deem the government to be conflicted.

18. They requested the court to order that the government be excluded from voting either for or against the scheme of arrangement.

19. The applicants’ further request was that those creditors who were opposed to the scheme of arrangement ought to be permitted to hold their separate meeting, so that they could thereafter file in court, a report of their resolutions.

20. It is common ground that the 1st Respondent holds 29. 8% of the shares in the petitioner, whilst KLM holds 26. 7% of the said shares.  In effect, all the other shareholders have the remaining 43. 5% of the shares.

21. It cannot therefore be denied that when a shareholder, such as the 1st Respondent, gave a loan to the petitioner, the factors governing such lending may not be the same as that of the applicants, who were not shareholders of the petitioner.

22. However, I would imagine that all creditors have the same interest, which is to recover the money which they loaned to the petitioner.  But that is not really the issue in this case.

23. The issue is whether or not there was a commonality between the respondents, who have all been pooled together into one class.

24. At a superficial level, one would say that there was no commonality because, on the one hand there was a creditor who was also the single-largest shareholder, whilst on the other hand, there were creditors who gave out loans at armslength.

25. I described that reasoning as being superficial because if it was right, it would imply that all the respondents who are commercial banks, and who therefore can be deemed to have lent money to the petitioner at armslength, would be in the same class.  Presumably, as the said banks were not shareholders, in the petitioner, their interests would be at cross-purposes with the interests of the government.

26. But the reality is that out of the eleven banks, who are respondents, eight appear to have a common stand with the government.  On a prima facie basis, therefore, I find that just because the government was the single-largest shareholder in the petitioner, that did not give rise to any conflict of interest.

27. And although the applicants suggested that the government would control the NATIONAL BANK of KENYA and KCB BANK, (by virtue of the substantial shareholdings it has in those 2 banks), there is no material which the applicants provided to the court to demonstrate, even on a prima facie basis, that those banks were incapable of making the kind of independent decisions which commercial lenders can take.

28. To ask that the votes for the National Bank, KCB and the government be reduced to zero would disenfranchise parties who are substantial creditors, from taking part in the making of decisions which would impact upon them.  The applicants have not given me any valid legal reasons to warrant such disenfranchisement.

29. The respondents are to proceed to the meeting in their capacities as creditors.  To that extent, they are in the same class, even though the degree to which they are owed, differs.

30. The applicants told the court that the respondents were so dissimilar as to make it impossible for them to consult together.

31. However, the petitioner has provided the court with evidence of meetings at which all the respondents consulted together.  Therefore, I find that the assertion that the respondents could not consult together is wholly without foundation.

32. The court was reminded that banks hold money belonging to depositors. Therefore, they are under an obligation to make disclosures to various regulatory bodies, including the Central Bank of Kenya.

33. Furthermore, the banks owe it to their respective depositors to be making disclosures.

34. In order for the banks to be able to make the necessary disclosures, they say that the gag order must be removed.

35. I have no doubt that the Constitution of Kenya requires a Public Trial, pursuant to Article 50.  However, I have no doubt that the said right is not absolute.

36. In appropriate cases, when the court is persuaded that the interests of justice would be best served by conducting hearings in camera, it would be perfectly right to impose confidentiality on the proceedings.  Examples of cases in which confidentiality would actually enhance the fairness of a trial include cases involving minors.

Has the petitioner put the cart before the horse, as stated by Mr. Gatonye advocate?

38. Pursuant to the Companies Act any alterations to the Capital Structure of companies can only be done by the Annual General Meeting.

39. The applicants said that if the Scheme Creditors passed a resolution at the meeting scheduled for 1st August 2017, the resolution would come to court for final approval.  It is after the court gives its approval that the matter would then be presented to the shareholders of the petitioner.

40. According to the applicants, there was a possibility that the shareholders could reject the scheme.

41. In effect, the applicants understanding is that the efficacy of the court order would depend on the Annual General Meeting.  That would mean, that if the petitioner’s shareholders rejected the scheme, the court could have acted in vain.

42. That is a very interesting argument, for it appears to suggest that the court would have given some final approval to the scheme before the shareholders had had their say on it.

43. First, the court is very alive to the role of the shareholders.  Therefore, the court cannot supplant the shareholders.

44. It is not for this court, or any other court to choose for the creditors whether or not to accept the scheme.

45. And if the creditors accept the scheme, the approval, if any, by the court cannot replace the shareholders’ mandate.

46. The fact that there are possibilities that the creditors could reject or modify the proposed scheme, together with the fact that the shareholders of the petitioner would have the final say, implies that the applicants’ contention of a faite accomplidoes not hold water.  It is for that reason that I described the applicants argument on this point as being interesting.

47. Another reason why I described the argument as interesting is that the applicants appear to appreciate the fact that the Capital Markets Authority had already given its approval to the proposed Scheme.  Ordinarily, such approval would also be given after the shareholders had given their approval.

48. The applicants drew the court’s attention to the fact that the Capital Markets Authority had talked of several options, whilst the petitioner was limiting the options.

49. In my considered view, provided that the options chosen by the petitioner were a part of those which had received approval, the petitioner cannot be faulted unless it can be demonstrated that the Capital Markets Authority had insisted that the petitioner must make available to the Scheme Creditors, all the options.

50. Mr. Nyaanga advocate pointed out that the scheme was unfair because if any creditor dissented, he would be deemed to have accepted a pre-set position.

51. If, as the applicants said, the creditors are expected to participate in the meeting, by giving their respective views, it would be expected that the said views be given due consideration.

52. At the end of the meeting, when those present had expressed their said views, a decision will be reached.

53. It is possible that the views of the applicants may sway the other creditors, who had given loans to the creditor at armslength.  It is also possible for the converse to happen, so that the other creditors end up persuading the applicants.

54. The third option is that each of the creditors retains their current positions.

55. The impact or the lack thereof, of the views expressed by the participants will only become clear when the vote was taken.

56. But, the court is also mindful of the possibility that the chairman of the meeting could conduct a skewed meeting, by calling upon participants of an already identified school of thought.  The hope might be that the members who belong to a different school of thought might end up being persuaded by those who are chosen to express their views.

57. To my mind, even if the chairman had a bias one way or another, that may not necessarily sway those holding a different view, to change their position.

58. A biased chairman could end up achieving results which were the very opposite of what he may have set out to do.

59. But it cannot be denied that the best chairman of a meeting in which the participants hold divergent views, is one who is fair.

60. A chairman may be fair, but if the participants or a category of the participants perceived him to have been leaning towards one side, the legitimacy of the process may be in jeopardy.

61. Whilst the applicants say that Mr. MBUVI NGUNZE cannot be an impartial chairman, as he was the immediate past –CEO of the petitioner, who was allegedly involved in running-down the company, I note that the applicants want to be given the mandate to choose an appropriate chairman.

62. To my mind, what is good for the goose, is good for the gander.

63. If a person is not appropriate as a chairman due to his intimate nexus with the operations of the company, it could also be said that a person chosen by the applicants would similarly be deemed as lacking impartiality and objectivity.

64. In my considered view, it is not the role of the court to choose the appropriate person who would then chair the creditors meeting.

65. And if the matter was left to the creditors, it appears that the applicants’ do not trust the choice made by the petitioner, whilst the petitioner appears to have confidence in persons who already have some background information about the situation in which the petitioner is in currently.

66. In order to avoid the possibility of legal challenges arising from the choice of the chairman, I find that both the applicants, on the one side, and the respondents will have to address me immediately after this Ruling, on how an appropriate chairman will be identified.  The court would then appoint the chairman and the person who will stand in his stead, when the chairman was unavailable.

67. In order to clarify the position, the court has not yet ruled out the possibility that the proposed names could be given consideration.

68. But it is important for the parties to bear in mind the fact that whoever is appointed must be available, ready and willing to immediately proceed with the task at hand.

69. For now, I find that all the respondents belong to the class of unsecured lenders.  It matters not the extent to which each has lent money to the petitioner.  Some respondents have put in more than others, but the bottom-line is that all the respondents do not currently hold securities from the petitioner.  If the petitioner were to go under, each of the creditors may end up losing the money which they had advanced to the petitioner.

70. And although the applicants had indicated that the petitioner had failed to consult them, there is considerable documentary evidence, which demonstrate that the petitioner had actively engaged the applicants and the other creditors in negotiations.

71. It does appear, on a prima facie basis, that the applicants were involved in discussions with the petitioner, which led up to the proposed scheme.

72. Therefore, I find, on a prima facie basis, that the impression which the applicants sought to create, that the scheme was an ambush visited upon them and that it was being rammed down their throats, is inaccurate.

73. Mr. Ngatia reasoned that although seven banks appear to support the proposed scheme, the fact that they have numbers on their side, did not necessarily imply that the said banks were right.

74. He may well be right; it is not for me to tell the banks whether or not their decisions made sound economic sense.

75. Ultimately, when it comes to casting of votes, in order to determine the way forward, I believe that Democracy is they way to go.  Be it in the political arena or in the scheme creditors meeting, democracy demands that those with numbers carry the day.

76. But, as I have already alluded to, earlier herein, everybody must have their say; and that is what the proposed meeting is intended to achieve.  If the applicants persuade some of the 7 banks, who are currently leaning in favour of the scheme, the votes cast with the applicants will increase.  That is what the applicants need to work on; persuasion that the 7 banks current position is not in their best interests or the best interests of the creditors.

77. In conclusion, the 3 applications have largely failed.  The meeting scheduled for 1st August 2017 shall proceed.

78. In the next 30 minutes, the court will hear the 2 sides on the question concerning the choice of the chairman.

79. As the applicants have only succeeded on one issue, and because the court has rejected the other reliefs sought, the 3 applicants will pay to the petitioner the costs of their respective applications.

DATED, SIGNED and DELIVERED at NAIROBI this31st dayof July2017.

FRED A. OCHIENG

JUDGE

Ruling read in open court in the presence of

Monari & Njogu for the Petitioner

No appearance for the 1st Respondent

Gatonye for the 2nd Respondent

K. Fraser for the 3rd Respondent

K. Fraser for the 4th Respondent

K. Fraser for the 5th Respondent

K. Fraser for the 6th Respondent

K. Fraser for the 7th Respondent

K. Fraser for the 8th Respondent

K. Fraser for the 9th Respondent

Ngatia for the 10th Respondent

K. Fraser for the 11th Respondent

Mugisha for Nyaanga for the 12th Respondent

Collins Odhiambo – Court clerk.