Kuguru Food Complex Limited v Mashreq Bank PLC & another [2022] KEHC 16422 (KLR) | Bank Account Fraud | Esheria

Kuguru Food Complex Limited v Mashreq Bank PLC & another [2022] KEHC 16422 (KLR)

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Kuguru Food Complex Limited v Mashreq Bank PLC & another (Commercial Case 1287 of 1999) [2022] KEHC 16422 (KLR) (Commercial and Tax) (9 December 2022) (Judgment)

Neutral citation: [2022] KEHC 16422 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Commercial Case 1287 of 1999

DAS Majanja, J

December 9, 2022

Between

Kuguru Food Complex Limited

Plaintiff

and

Mashreq Bank PLC

1st Defendant

Dubai Bank Kenya Limited (In Liquidation)

2nd Defendant

Judgment

1. As the date of the suit suggests, this matter has had a chequered history spanning close to 23 years. From several adjournments, interlocutory applications and appeals, hearings and re-hearings, an interlocutory judgment to the unfortunate passing of the judge who was then hearing the matter. This suit has seen it all and it is close to a miracle that some of its participants, who are now quite sickly and ageing are alive to see its end through this determination.

2. A brief background of this matter was highlighted by the Court of Appeal in Mashreq Bank P.S.C v Kuguru Food Complex Limited NRB CA Civil Appeal No. 71 of 2011 [2018] eKLR. On or about 27th September, 1999 the Plaintiff filed suit against the 1st Defendant principally seeking special and general damages for negligence and fraud allegedly committed by the 1st Defendant, its servants and/or agents. The 1st Defendant denied liability and after the pleadings closed, the hearing started on or about 12th July, 2000 before Hewett, J., who unfortunately passed away after hearing three witnesses of the Plaintiffs. Those three witnesses were Dinesh Chandra Bhatesa (PW1), Peter Ngibuini Kuguru (PW2) and Ann Wanjiru Kuguru, (PW3).

3. After the unfortunate demise of Hewett J., the matter was listed for mention and after some back and forth, the court ordered the proceedings to be typed and furnished to each of the parties. When the parties were furnished with the typed proceedings, the matter came up for hearing on 25th August, 2001 before Mbaluto J., (as he was then) and Mr. Amin, counsel for the 1st Defendant, indicated to the court that he was not happy about the contents of the typed proceedings and he preferred the witnesses be heard de novo. Mr. Makori, counsel for the Plaintiff, left the issue to the court whereupon the court made an order that the trial start de novo.

4. The court fixed the matter for hearing several times but for one reason or another, the matter was adjourned and the hearing did not proceed. Finally, the matter was fixed for hearing on the 15th June 2005 but just before the hearing, the Plaintiff filed an application seeking review and setting aside of the order directing that the suit be heard de novo. Waweru J., after hearing the matter, allowed the application by a ruling dated 18th November 2005 where the order made on 25th September 2001 by Mbaluto J., was set aside and substituted with an order that the suit should proceed for hearing from where the late Hewett, J., left it.

5. This ruling provoked an appeal to the Court of Appeal. The appellate court allowed the appeal by the ruling dated 18th November 2005 resulting in this suit being heard de novo. The Plaintiff re-amended its Plaint on 15th October 2019 to which the 1st Defendant responded by its amended defence dated 30th October 2019. In the re-amended Plaint, the Plaintiff introduced the 2nd Defendant as a party owing to a sale and transfer of the 1st Defendant’s assets and liabilities to the 2nd Defendant. The 2nd Defendant failed to enter appearance despite being served with summons and the re-amended plaint prompting the Plaintiff to seek judgment against for Kshs. 4,664,880. 00 together with interest at the rate of 22. 5% from the date of loss being 9th June 1997 until payment in full. On 20th December 2019, the court entered an interlocutory judgment against the 2nd Defendant. After about 10 months, the 2nd Defendant, through the Notice of Motion dated 29th October 2020 applied to set aside the interlocutory judgment. By the ruling dated 2nd March 2021, the court allowed the application and set aside the interlocutory judgment.

6. Prior to the 2nd Defendant filing its application to set aside the interlocutory judgment, the matter had been set down for hearing on 28th September 2020. The Plaintiff relied on inter alia its re-amended Plaint dated 15th October 2019, the reply to the 1st Defendant’s amended defence dated 5th November 2019 and the lists of documents dated 31st October 2019, 6th December 2019, 4th February 2020, 10th June 2020, 31st August 2020 and 5th September 2020. The Plaintiff further called and relied on the evidence of 4 witnesses; Emmanuel Karisa Kenga, a document examiner (PW 1), Peter Kuguru Ngibuini, the Plaintiff’s Managing Director (PW 2), Anne Wanjiru Kuguru,the Plaintiff’s Finance Director (PW 3) and Dinesh Chandra Bhatesa (PW 4), an acquaintance of PW 1.

7. The 1st Defendant did not call any witnesses. After the court set aside the Interlocutory Judgment, the 2nd Defendant filed its statement of defence dated 7th March 2020 and bundle of documents dated 18th March 2021. It also called one witness, James Masega Ombasa (DW 1), a Resolution Officer at Kenya Deposit Insurance Corporation. At the close of the hearings, the court directed the parties to file written submissions which are on record.

The Plaintiff’s case 8. The Plaintiff’s case is that sometime in June 1997, the Defendants negligently and fraudulently opened or caused to be opened a current account number 01******0-6 (“the subject account”) in the name of the Plaintiff without instructions or authority from the Plaintiff. The Plaintiff avers that the said account was illegally and irregularly applied for and opened upon presentation of and using of forged documents; a certificate of incorporation in the name of the Plaintiff, a letter of Board of Directors’ resolution from the Plaintiff and an introduction letter from PW 4. Thus, the Plaintiff claims that Kshs. 4,664,880. 00 was illegally and fraudulently processed and paid by the Defendants to third parties without the knowledge, authority and/or instructions of the Plaintiff and the Plaintiff seeks this amount together with interest of 22. 5%.

9. The Plaintiff states that the said account was illegally operated between 9th June 1997 to 31st December 1997 when it was closed by the Defendants. That various cheques were banked with the 1st Defendant, cleared and paid to unknown persons who were neither authorized nor instructed by the Plaintiff. The Plaintiff accuses the Defendants of failing to exercise reasonable care, skill, diligence, competence and the standard of care and guidelines and practice obtaining in the banking industry whilst acting in connection with the opening, operation and carrying out transactions on the said account. The Plaintiff claims that it suffered loss and damage caused by the negligence, fraud, conspiracy and concealment of the Defendants jointly and/or severally.

10. As regards the capacity of the Defendants, the Plaintiff contends that if indeed the 2nd Defendant took over all the liabilities of the 1st Defendant, which the Plaintiff still denies, then the 2nd Defendant is liable. In any case, the Plaintiff states that the 1st Defendant is still liable because the liability is of a criminal or quasi-criminal nature, the same having arose from fraud or fraudulent dealings on the part of the 1st Defendant and that such acts are not transferrable. The Plaintiffs’ witnesses gave testimonies along the lines I have highlighted above.

The 1st Defendant’s Defence 11. The 1st Defendant avers that it is a public shareholding company duly incorporated in Dubai in the United Arab Emirates. It denies that it is registered to do business as a foreign company in the Republic of Kenya. It further contends that it sold its business in Kenya to the 2nd Defendant on or about the year 2000 after which it exited from Kenya and ceased to have any business in Kenya since that date. The 1st Defendant denies any liability as alleged by the Plaintiff and insists that it transferred all assets and liabilities including this suit to the 2nd Defendant when it sold its business in 2000. That this transfer of assets and liabilities was affirmed by the court in Dubai Bank Kenya Limited v Insurance Company of East Africa Limited HCCC No. 55 of 2004 [2013] eKLR.

12. The 1st Defendant denies the allegations made against it by the Plaintiff. Further and without prejudice, it denies that it acted negligently and/or fraudulently as alleged in respect of the subject account or that it illegally and irregularly applied for and opened with the use of forged documents. The 1st Defendant asserts that the account was opened with the instructions and authority of the Plaintiff who provided original company documents in support of the account opening application and that all the proper requirements and account opening procedures were fully followed and satisfied.

13. The 1st Defendant states that if the said account was opened illegally and fraudulently then such illegality or fraud was carried out by persons’ unknown to it either in fraudulent collusion with the Plaintiff or in the alternative as a direct result of negligence on the part of the Plaintiff in that it allowed its original documents to fall into the hands of unknown persons. The 1st Defendant denies that the Plaintiff suffered loss and damage and that its claim is unfounded and without merit.

The 2nd Defendant’s Defence 14. The 2nd Defendant’s defence mirrored that of the 1st Defendant. It denies that it acted negligently and/or fraudulently as alleged or that the said account was illegally and irregularly applied for and opened with the use of forged documents as alleged. The 2nd Defendant avers that the subject account was opened with the instructions and authority of the Plaintiff, which provided original company documents in support of the account opening application and denies the allegations of fraud and negligence which if anything, it attributes to the Plaintiff. The 2nd Defendant’s witness also gave testimony along these lines.

Analysis and Determination 15. I have gone through the parties’ pleadings, evidence and submissions. The main issue for determination is whether the Plaintiff has proved, on the balance of probabilities, that the Defendants jointly and/or severally caused the subject account to be opened without the knowledge, instructions and/or authority of the Plaintiff and if so, whether it is entitled to the relief sought in the Plaint.

16. The Plaintiff, through the testimony of PW 2, stated that the persons purportedly authorized to open the subject account on behalf of the Plaintiff were not employees of the Plaintiff and that the letter and resolutions dated 28th May 1997 and 12th June 1997 that purportedly authorized the release of the Plaintiff’s Certificate of Incorporation, Memorandum and Articles of Association were not signed by PW 2 and were a forgery. The Plaintiff impugns the letters for not using the company’s current letterhead and using telephone and fax numbers that did not belong to the Plaintiff.

17. The Plaintiff accuses one of its rogue employees of perpetuating the fraud but also implicates the Defendants by stating that the manner in which the cheques were cleared and cash withdrawn was suspect and imputed wrongdoing on the Defendants’ employees or agents. That the 14 cheques that were deposited in the subject account were made by the said rogue employee, MNW and was not authorized or instructed to transact on behalf of the Plaintiff as the Plaintiff had an authorized cashier to undertake the deposit.

18. PW 3 stated that the said rogue employee, MNW, was responsible for preparing banking pay-in slips, occasionally taking the same to the bank and preparing reconciliation of accounts each day but that usually it was the messenger who used to take the cheques and the bank pay-in-slips to the bank for banking. That after the same were banked and the pay-in slips returned, she would check the pay-in slips with the receipt book but never checked the totals. However, she later realized that some of the cheques were never banked in the Plaintiff’s known account then but in the subject account. She stated that the money banked in the subject account was not for the Plaintiff’s benefit but rather for the benefit of the perpetrators of the fraud against the Plaintiff. PW 3 pointed out that the documents used for opening the subject account were forgeries and that the opening of the same was also irregular as the Defendants did not confirm or verify with the Plaintiff before opening the subject account.

19. PW 4 stated that he was the director of a company known as Gnanjivan Screws & Fasteners Limited and that he had known PW 1 for 36 years. He denied that he was the one who introduced the persons who opened the subject account to the Defendants and that he did not have any personal knowledge of the said persons. He further stated that the signature appearing on the subject account’s opening form was not his but was in fact a forgery including the stamp of his company Gnanjivan Screws & Fasteners Limited. PW 4 faulted the Defendants for not contacting him to verify whether he had seconded anyone to open an account with them and yet they had his contacts and he was easily accessible if they wanted to ascertain the authenticity of the referral.

20. PW 1 stated that his comparison of the signatures and stamp impressions appearing in the impugned letters and resolutions of 28th May 1997 and 12th June 1997 against the specimens provided led him to conclude that the said signatures in the letters were not made by the same person and were not of PW 2. He further concluded that there were no agreements between the signatures, stamp impressions and letterheads.

21. The Defendants did not deny that the subject account was opened on 9th June 1997. However, they contended that the said account was opened with the instructions and authority of the Plaintiff, which provided original company documents in support of the account opening application and after all the proper requirements and account opening procedures were fully followed and satisfied. The Defendants confirmed that they received an Account Opening Form establishing the identity and business occupation of the intended account holders which was duly completed, an existing customer of good standing by Gnanjivan Screws & Fasteners Limited who acted as an introducer on the account, and the signature of PW 4 was verified against specimens held by the 1st Defendant; Identification documents obtained from the persons opening the subject account and inspected by the 1st Defendant and that since the proposed account-holder was a company, the 1st Defendant obtained and inspected its original Memorandum and Articles of Association, Certificate of Incorporation and Board Resolution authorising the opening of the account, and retained certified true copies of the same.

22. The Defendants insisted that the 1st Defendant duly followed all the required guidelines, practice and procedures, and used reasonable care, skill and diligence in opening the subject account. In his testimony, DW1 admitted that from his examination of the records of the 1st Defendant, he could not establish the complete record of the transactions that happened back in 1997 with the 1st Defendant. However, he stated that all the documents required were presented and that there was a complete record of documents presented for account opening.

23. In making this determination, I am guided by the fact that the standard of proof in civil cases is on a balance of probability and that the burden of proof is on the party alleging the existence of a fact which he wants the Court to believe. This is anchored in section 107 (1) and (2) of the Evidence Act which provides that “whoever desires any Court to give Judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist” and that “When a person is bound to prove the existence of any fact it is said that he burden of proof lies on that person”.

24. As regards the standard of proof, the Court of Appeal in James Muniu Mucheru v National Bank of Kenya Ltd CA Civil Appeal No 365 of 2017 [2019] eKLR simply put it that, “Courts will make a finding based on which party’s version of the story is more believable.’’ Lord Denning, in Miller v Minister of Pensions [1947] ALL ER 372, aptly summarised the application of the standard of proof in civil cases; proof on the balance of probabilities as follows:That degree is well settled. It must carry a reasonable degree of probability, but not so high as is required in criminal cases. If the evidence is such that the tribunal can say: We think it more probable than not; the burden is discharged, but, if the probabilities are equal, it is not. Thus, proof on a balance or preponderance of probabilities means a win, however narrow. A draw is not enough. So, in any case is which the tribunal cannot decide one way or the other which evidence to accept, where both parties’ explanations are equally (un) convincing, the party bearing the burden of proof will lose because the requisite standard will not have been attained.

25. My analysis of the parties’ evidence leads me to conclude that the Plaintiff never authorised any of the persons who opened the subject account to do so. The Plaintiff’s evidence was unshaken and uncontroverted that PW 2 and PW 4 did not sign either of the resolutions, account opening forms or introduction letters authorizing the opening of the subject account. The 2nd Defendant’s assertion that the said signatures were verified by the 1st Defendant is without proof as there was no evidence to demonstrate how that verification, if any, was done. What is evident is that no diligence was done to verify the directorship of the Plaintiff and none was done to verify that PW 4 was the introducer or referee of the Plaintiff and that he signed the introduction letter. This lack of due and proper diligence by the 1st Defendant imputes negligence on its part.

26. In Standard Chartered Bank Kenya Ltd v Intercom Services Ltd & 4 others NRB CA Civil Appeal No. 37 of 2003 [2004] eKLR, the Court of Appeal considered the burden of imposed on a banker where negligence against it is alleged. It stated as follows:The onus of establishing circumstances showing absence of negligence is on the banker. It is a matter of defence, and does not give a substantive cause of action. The extent of inquiry must be measured by what in the circumstances a fair minded banker paying due regard to the exigencies of banking business in relation to the person depositing the cheque would consider it prudent to do in order to protect the interest of the true owner and each case must depend on its own circumstances. (See The London Bank of Australia Ltd v Kendall (1920) 28 CLR 410, at pages 410, 411, 417). The standard of care required is that to be derived from the ordinary practice of bankers not individuals. (See The Commission of Taxation v English, Scottish and Australian Bank Ltd [1920] AC 683 at page 689 and Marfani & Co Ltd v Mindland Bank Ltd [1968] 2 All ER 573).

27. The Defendants did not demonstrate that they were not negligent in the manner they allowed the subject account to be opened. This is amplified by the fact that they allowed various transactions on the subject account without any due regard to the identity of the depositors and withdrawers of the funds therein. I find that the Defendants are guilty of negligence in the opening of the subject account and that they failed to take proper precautions so as to ensure that the persons who claimed to have authority to open the said accounts were legally who they said they were or that the person who actually introduced these people actually wrote the letter introducing them (see Vehicle Industries Ltd v Southern Credit Banking Corporation Ltd (2014) eKLR).

28. Having found that the Defendants were negligent in allowing the subject account to be opened, the next question is whether they should be held accountable and liable for the loss suffered by the Plaintiff as a result. Whereas the 1st Defendant has sought to distance itself from any liability owing to an apparent transfer of assets and liabilities to the 2nd Defendant, I find that this issue was already raised by the 1st Defendant and a determination made by the court through its ruling of 4th October 2019. The court has already pronounced itself on the matter when it stated that there was no evidence that any liability arising from this suit was transferred to the 2nd Defendant. Since the position has not been reversed by the Court of Appeal, the 1st Defendant cannot escape liability on this account.

29. It is for these reasons that I find both Defendants liable for the loss suffered by the Plaintiff. The amount siphoned off from the Plaintiff through the subject account amounting to Kshs. 4,664,880. 00 and transacted in the subject account is not contested. The Plaintiff has also justified the interest rate of 22. 5% by producing documents showing interest awarded to fixed deposits as being in the average of the claimed 22. 5% which is what the Plaintiff could have earned had the said sum been in a fixed deposit account. However, there is no evidence the money was intended for investment in a fixed deposit account. What is apparent is that the money was being deposited in a trading account. In the circumstances, I will award interest at court rates.

Conclusion and Disposition 30. For the reasons I have set out above, I find that the Plaintiff’s suit succeeds and as a result I enter judgment for the Plaintiff against the Defendants, jointly and severally as follows:1. Kshs. 4,664,880. 00 with interest at 12% per annum from the date of filing the suit until payment in full.2. Costs of the suit with interest at court rates from the date of judgment until payment in full.

DATED andDELIVERED atNAIROBI this9THday of DECEMBER 2022. D. S. MAJANJAJUDGECourt of Assistant: Mr M. OnyangoMr Mwaure instructed Mwaure and Mwaure Waihiga Advocates for the Plaintiff.Mr Amin with Mr Misaro instructed by Amin and Company Advocates for the 1st Defendant.Mr Obuya instructed by TripleOKLaw Advocates LLP for the 2nd Defendant.