The Dangers of Cross Border Banking

Our neighbors in Uganda have recently provided some very interesting judicial pronouncements that have created clammy hands of fear into the Kenyan banking industry that lies eastward across the Victorian pond. In the most recent case, a Ugandan businessman borrowed a series of loans running in the tens of millions of US dollars from a Ugandan subsidiary of a Kenyan bank, part of the borrowing of which was lent by the Kenyan parent bank. It is fairly common throughout the world for local subsidiaries of banks to draw on the strength of the parent bank’s balance sheet simply because of lending limitations of the subsidiary in its jurisdiction. A bank has legal lending limits that are linked to its capital base therefore it may ask the parent to take on a loan that would breach the subsidiary’s statutory lending limits. Typically these loans would be in foreign currency and would be assessed at the parent bank’s credit committee level. The local subsidiary bank then becomes a collection agent for the principal and interest payments and remits the same to the parent bank.

This kind of lending is not only limited to the private sector. Governments also take on commercial loans from foreign banks in what are known as syndicated loans where a group of banks, some of which may have local presence, provide a loan to the government and appoint one bank as the collection bank. The collecting bank, acting as a collection agent, will receive the loan repayment from the government and then remit the same to the various lenders in the syndicate. Due to the significant size of the loans, more often than not the loans will be placed on the parent bank’s balance sheet as they have the financial liquidity to provide the funds as well as the capital strength to support loans of that size from a single borrower lending limit perspective. Back in the Ugandan case, the Ugandan businessman fell into deep trouble and couldn’t service his loans. After scrambling about unsuccessfully trying to find another lender who could take over the loans from the Kenyan subsidiary and the Kenyan parent banks, he and his lawyers came up with a brain wave of Donald Trump proportions: Sue the banks claiming that attempts at collecting the loan repayments were tainted with fraud and, wait for it, that the Kenyan parent of the bank was not licensed to conduct the business of a financial institution in Uganda by the regulator Bank of Uganda, and therefore the loan from the Kenyan parent was illegal from the onset. Moreover, the law suit also claimed that the Kenyan parent bank required explicit authority from the regulator to appoint its Ugandan subsidiary as an agent to collect the loan repayments.

A pretty bizarre argument given the fact that at the point where the loan was approved and disbursed, the Ugandan businessman quite likely smacked his lips in pure glee, popped a bottle of champagne and proceeded to withdraw the money with no qualms about the licensing capacity of the source of funds.

The judge presiding over the case took no prisoners in his 7th October 2020 judgement and issued a stupefying ruling that beggars belief. He ruled that indeed the Kenyan parent bank did not have the legal license to conduct business in Uganda and therefore the loan was invalidly issued, secondly he ruled that the Kenyan bank did not have authority from the regulator to appoint its Ugandan subsidiary as a collecting agent and then he ordered that all the properties that had been mortgaged as securities by the businessman be released back to him forthwith. Further, the judge ordered that all the monies that the bank had recovered from the borrower in the course of trying to enforce payment be reimbursed.

The judgement sent the Ugandan banking association into a tearful tizzy, with its Kenyan counterpart holding up tissues in support. It put into grave danger a whole series of loans that Kenyan and South African banks with Ugandan subsidiaries had provided, but also inadvertently called into question syndicated commercial loans that had been given to the Government of Uganda by local and foreign institutions. The Bank of Uganda (BoU) Governor issued a statement a week later on 14th October 2020, essentially taking the high court judge to school on what the definition of a foreign bank conducting business in the Ugandan jurisdiction was as per the relevant law, as well as what that same law defined as an agent bank, both of which the high court judge had misinterpreted. The Governor also explained what the BoU’s regulatory reach was as far as foreign banks that were undertaking lending or non-deposit taking activity in Uganda. In simple words: Judge, get a life!

Anyway, the Ugandan subsidiary and the Kenyan parent bank rushed to court  to get a stay of execution on the high court judge’s order pending appeal, which was mercifully given. In the stay of execution judgement dated 2nd November 2020, the judge gave a zinger of a parting shot: “Before I take leave of this matter, I was flabbergasted by one of the parties sending emissaries to me with financial proposals in order to influence my decision. This is disgusting to say the least.” Well, I leave it to you to guess who might be the party so unnamed.

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Twitter: @carolmusyoka

Shadow Directors

Maneno Ltd is a Nairobi Stock Exchange Listed company in the business of manufacturing consumer products. The founder, Michael Monga, was a well-respected businessman with multiple interests in various industries some of which interests have led to obvious potential conflicts. As Monga was quite alive to the effect of negative publicity on his business interests, he often appointed proxies to the boards of companies in which he was a substantial owner. Maneno Ltd had three such directors, who were senior employees in Monga’s other companies. Monga, being a very shrewd player, was also careful to select independent non-executive directors that could be prevailed upon to play ball where required.
Due to a fairly loose enforcement regime, cheap imports of the same consumer products that Maneno manufactured had started to flood the Kenyan market and management were spending valuable time firefighting with the relevant government agencies. Prudent past management had ensured that a significant amount of cash had been set aside and invested in money market instruments in anticipation of a strategic plant expansion that had been planned in the 5 year strategy. Monga instructed his three directors to support the Managing Director’s board paper recommending an interim dividend. That seemed strange as the financial projections indicated that the company was going to make a loss that year due to shrinking sales. The paper was approved and a special dividend was paid. The company went ahead to make losses and the following year a hefty final dividend was declared that essentially wiped out the healthy cash reserves that Maneno had been holding. As sordid stories go, within no time Maneno was bleeding cash, as management was unable to stem the effect of cheap imports versus their own locally manufactured products in an aging plant with high labor costs. The company filed for insolvency within two years of the final hefty dividend payout.
What potential remedies exist for the minority shareholders who were held at glorious ransom by the corporate shenanigans of Michael Monga? Both Kenya and Uganda have recently revamped their company laws from the archaic 1948 UK Companies Act that formed the basis of local company law. Uganda passed the Companies Act 2012 and Kenya followed suit with the Companies Act 2015 both of which laws essentially aligned company law with modern norms such as the concept of a shadow director. Company law defines a shadow director as someone who has not been formally appointed as a director but in accordance with whose directions or instructions the directors of a company are accustomed to act.
If you’re struggling to picture one, think of a multinational company in Kenya, whose board is regularly instructed by “group” via the managing director, on when to declare dividends or when to postpone making critical provisions on their financial statements. It can also be the finance director of a Kenyan company that has regional subsidiaries and demands the same financial behavior of the subsidiary boards. [It bears noting that the Tanzanian Company Act 2002 does not expressly define shadow directors.] It can be a cabinet secretary who regularly issues instructions to the board of a limited liability company with significant government ownership. In the Maneno Ltd example, Michael Monga is a classic example of a shadow director. Not only was he giving express instructions to the non-executive directors, but he also ensured that he indirectly controlled the board through the appointment process. For all intents and purposes, Monga was the board.
Company law recognizes that while de jure directors (directors by law) have fiduciary duties to the company including the duty to act in the best interests and promote the success of the company, de facto directors (directors in fact) also owe the company fiduciary duties and can therefore be held accountable for their acts in the same vein as the directors on record. This premise was established in the 2013 landmark United Kingdom case of Vivendi SA and Centenary Holdings Ltd versus Murray Richards and Stephen Bloch. In the case, as succinctly summarized on the Helix Law website, a shareholder of a company in trouble used his influence to make the sole director of the company pay him a salary and other money from the company, without providing any benefit or services back. These payments were made while the company was insolvent. The company went into liquidation and its receiver claimed compensation from the shareholder claiming that a) he was a shadow director b) a shadow director owed the company fiduciary duties as if he had been formally appointed as a full de jure director and c) the shareholder had breached those duties. A Burges- Salmon blog on the shadow director subject matter summarized the court’s findings thus: On the first issue, the court found that the sole director was accustomed to acting in accordance with the shareholder’s instructions and therefore the shareholder satisfied the test for shadow directorship. On the second issue it was found that in giving instructions to de jure directors, a shadow director assumed responsibility for a company’s affairs. However while a shadow director’s duties were not statutorily provided for, the consequences of being found to be a shadow director must evidence Parliament’s perception that a shadow director could bear responsibility for a company’s affairs. The court also observed that a shadow director’s role in a company’s affairs might be just as significant as a de jure director, and that public policy pointed towards statutory duties being imposed on shadow directors.
What does this mean for Michael Monga and many like him?
Company Law now provides extraordinary personal consequences to the shadow director including: a liability to contribute to the company’s assets following the company’s insolvency, disqualification from being a director of any company in Kenya following the company’s insolvency as well as criminal sanctions and personal liability for violations of director’s duties.
As a parting shot, while de jure directors may rely on Directors and Officers insurance cover, the shadow director is most definitely not covered under the same. If you sit on a Kenyan or Ugandan board, now would be a good time to look over your shoulder and find those shadows.
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Early birds catch the government worms

[vc_row][vc_column width=”2/3″][vc_column_text]Juma was retired and had started a second career. However, he just couldn’t seem to get to work on time. Every day he was at least 30 minutes late. However, he was a good and clever worker, so the owner was in a quandary about how to deal with it. Finally, he called Juma into the office for a talk.
‘Juma, I have to tell you, I like your work ethic, you do a top class job, but your being late so often is quite a worry.’
‘Yes, I realize that, sir, and I am working on it.’ replied Juma.
‘I’m pleased to hear that,” said the owner. “It’s odd though, you’re coming in late when I know you retired from the Army. What did they say if you came in late there?’ Juma replied, ‘They said, Good morning, General!’

Sometime in 2006, I had the good fortune to attend a Rwanda Investment Conference organized by the Rwandan Government to showcase and set the scene for foreign investment in the country. My colleague and I arrived at the venue at about 8:15 a.m. having been warned to get there early as the doors would be closed once President Kagame entered the conference centre for the opening ceremony at 9 a.m. We patiently lined up through the security checks and I was pleasantly surprised to find the entire cabinet as well as their permanent secretaries had taken their seats on the front rows. My colleague, who had done business in Rwanda before, said that this was the opportunity to meet the Ministers and set up any meetings that one required. Conference attendees mixed freely with the Ministers and lots of business cards were exchanged and meetings set up as I watched. At 8:58 a.m. President Kagame strode in onto the podium and, on cue, the Rwandan national anthem began to play. At 9:00 a.m. on the dot, President Kagame sat down and the function began. For a time Nazi like me, it took every ounce of self-control not to stand up and give the man a hi five.

A year later found me in Jinja, Uganda where construction for the Bujagali Hydroelectric Power Station was being commissioned. The project was a joint venture between the Investment Promotion Services, a division of the Aga Khan Fund for Economic Development and an American energy company Sithe Global Power. The government of Uganda is a minority shareholder in the venture as well. Due to it being a critical pillar of Uganda’s infrastructure, President Museveni would be the guest of honor. His Highness the Aga Khan was also present due to the size and the importance of the project. Now if anyone has been around a function with His Highness the Aga Khan you will know that he is accorded protocols equal to a head of state so you can imagine the level of security at the venue. My colleague John and I arrived at the venue at least an hour earlier than the slated official start time of 10 a.m. to ensure we got good seats. John had a whole bunch of magazines in the back seat of his car as we left Kampala. “You need to have plenty of reading material at a presidential function in Uganda,” was his response to my quizzical expression. I shortly got to see why.

As soon as we got to Bujagali, our mobile phones stopped working due to the signal jamming devices that are used at any Ugandan presidential function. His Highness the Aga Khan was already on site and meeting guests in a separate holding tent that had been set aside for him. At 10 a.m. guests were still milling about and I asked John why we weren’t being asked to take our seats. He chuckled and handed me a couple of magazines. “Brace yourself,” were John’s ominous words. President Museveni arrived at the venue at 2 p.m. or exactly four hours late, with absolutely no apologies for keeping any of the guests waiting including His Highness. As soon as the national anthem was sung, he sat down and promptly closed his eyes in a peaceful repose. They only flew open when he was called to make his speech about 45 minutes later.

We were hot, hungry and extremely frazzled by the time we left the venue. The President had demonstrated, quite succinctly, what he thought of foreign investors on his home soil. On Thursday last week I was having lunch with some colleagues at a popular Westlands restaurant frequented by leading business executives and government officials. It was the last day of the Pre-Global Entrepreneurship Summit events at the Kenyatta International Conference Centre (KICC). Some of my colleagues had attended the opening ceremony earlier in the week and noted with disappointment that none of the Cabinet Secretaries had remained behind after the President left shortly after opening the event. The disappointment stemmed from the fact that the quality of exhibitions and panel discussions were so high that they warranted a level of engagement from senior government officials if they were indeed committed to showcasing the Kenyan entrepreneurial talent that had an enviable global spotlight. Present at the restaurant was a Cabinet Secretary who was in the printed agenda as being the lead government official for the closing ceremony that was slated for 3 p.m. The Cabinet Secretary comfortably sat sipping a glass of wine even as I left the restaurant at 3:15 p.m. It can’t be said that the official flag on the Cabinet Secretary’s flag would magically transform into wings and fly the government official to KICC at least 5 kilometres away.

But the conference participants at KICC could afford to wait for a leisurely lunch to end. After all they had nothing but time to wait. For wine to be sipped. At this time of global attention on Kenya’s biggest showcase events. Mentally, I doffed my hat to the Cabinet Secretary as I left the restaurant, “Good afternoon, General.”

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Death and Taxes

“In this world, nothing can be said to be certain except death and taxes.” Benjamin Franklin

Sometime in 1996, I took a road trip to Kampala driving northwest through Eldoret and crossing into the beautiful, lush countryside of Uganda via the Malaba border town. It was a relatively uneventful trip except the shock of driving past a small town that looked deserted save for a large cemetery to the side of the highway with several stark white crosses marking the graves of the former town occupants. I didn’t put much thought into it until several days after reaching Kampala and a discussion came up on the dinner table with our Ugandan hosts about the vagaries of AIDS on the population. One of the Ugandans then reminded us about that town, saying that the its population had been decimated by the disease and it remained a stark reminder to Ugandans about the clear and present danger of HIV. Now this was almost twenty years ago, when the social stigma associated with HIV and driven by ignorance and fear was at its highest and, in retrospect, was the likely cause for any surviving residents to move out and desert the town.

I haven’t driven to Kampala since then and I am curious to know what has changed over the last two decades, but I do know that I always remember that scene whenever I am on the Nyeri highway. If one looks at the smallholder farms that straddle both sides of the road past Makuyu and all the way to Karatina, there are always one or two gravestones set aside in the compounds marking the final resting place of loved relatives. In many cases, banana trees or maize surround the gravesides and I often wonder what will happen to the productive capacity of the land, once more people are buried on the small farms thereby shrinking the land available for food production. By the way, if you are the queasy type, I strongly suggest you stop reading this right now and turn the page forthwith.

But that is not even the looming danger. The proximity of these farms to the main highway means that in the event that the road is expanded into a dual carriageway, the movement of those graves is inevitable. Furthermore, since focus is now turning to counties as the engine of economic growth, a lot of the farming activity happening adjacent to large traffic arteries will face pressure for conversion into commercial use as rental housing and shopping centres. I have come to realize that the African native does not like to address the unpleasant issue of burial grounds. The same African native also does not want to think three generations ahead of him, which generations will have a weak, lukewarm or virtually non-existent affinity to his memory. Our loved ones bury us. They talk about us to their own loved ones with much affection tinged with happy memories of eventful interactions. If we are lucky, we might even have our own interactions with the loved ones of our loved ones or, simply put, our grandchildren. However, it is through the grace of the most high that we will live long enough to see our great grand children and by that time they will quite likely be relieved at our departure from our earthly domain. Assuming that we do not get to see our great grandchildren, whatever burial spot our remains will be will have no bearing on those who are living. If the ubiquitous “private developer” comes calling, our great grand children will sell. However, if they are clean of heart and clear of conscience, they may not sell but will curse us to eternal damnation for depriving them of the opportunity to unlock the value on a piece of productive land. Then their children will sell.

Quite simply, our burial traditions will inevitably clash with the growing size of the population and the inevitable expansion of urban centres. We need to address the sensitive and awkward issue of land use in Kenya. But we won’t. Why? Because the native African neither plans for his death nor plans for any generations past the ones he can see immediately in front of him. The patriarchs of three families I know got together and bought a piece of land for their burial and those of their wives. To ensure posterity, they gave that property to a church, which has built a place of worship for the public thereon. I would like to assume that the burial ground, which has now become a holy place, will eventually be populated by church ministers and remain well tended for tens if not hundreds of years – assuming that the Christian faith as we know it survives the foibles of time. That should be the logical thought process for those of us natives who do not want to be buried in a public cemetery but want to be in a place that has linkages to a place we call home.

Kenyans are very good at coming together to do things. The harambee spirit is as encoded in our collective DNA as is electing bad politicians in every election cycle. Contributing an acre as a village, as a clan or as a family or buying land as a group of friends to bury members and their spouses is one way to start changing the mindset and releasing future generations from the burdens of having to knock over our graves as they sell to private developer Singh. Either that, or we begin to have the very uncomfortable conversation about the quite obvious economic merits of cremation.

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Twitter: @carolmusyoka