The investigatory and enforcement mandates of the Capital Markets Authority were constitutional despite being held by the same institution.
Alnashir Popat & 7 others v Capital Markets Authority  eKLR
Constitutional Petition No. 29 of 2019
Supreme Court of Kenya
DK Maraga, CJ & P, MK Ibrahim, SC Wanjala, NS Ndungu & I Lenaola, SCJJ
December 11, 2020
Reported by Beryl Ikamari & George Kariuki
Constitutional Law – Bill of Rights – right to fair administrative action – right to a fair hearing – whether a tribunal could act as both investigator and judge in its own case – whether the investigatory and enforcement mandate of the Capital Markets Authority were constitutional - Constitution of Kenya 2010, articles 25(C), 35, 47(1) and 50(1); Capital Markets Act (cap 485A), section 11(3)(cc) and 11(3)(h)
Administrative Law – natural justice – impartiality of the decision-maker – legality of the Capital Markets Authority’s investigatory and enforcement – whether actual bias or an appearance of bias was the likely result of having the Capital Markets Authority serve as an investigator and an enforcer in the cases of infractions of the provisions of the Capital Markets Act and the regulations made thereunder.
The petitioners in this case were non-executive directors of Imperial Bank Limited (the bank) which had been put under receivership. The respondent, a statutory regulatory authority established under section 5 of the Capital Markets Act and charged with promoting, regulating and facilitating the development of orderly, fair and efficient capital markets in Kenya.
In August 2015, the respondent approved the bank’s application to issue to the general public a corporate bond of Kshs. 2 Billion. Only the bank’s Managing Director and the Chief Finance Officer were privy to that application.
In September 2015, the managing director passed on and the former head of credit was appointed acting MD and deputized the former CFO. In September, the two caught wind of an array of illegal transactions authorized by the late Managing Director and reported the same to the chair of the non- executive directors. The latter in turn contracted FTI consulting group, to carry out a forensic audit of the bank’s financial affairs and report on its accurate financial position. It also resolved not to utilize the approved bond issue pending the outcome of the investigations by the consultant.
It was found that the former MD had indeed been running a scheme of fraudulent disbursements resulting in losses running into billions of shillings and the board reported the same to Central Bank (CBK) who in turn placed the bank under receivership and appointed the Kenya Deposit Insurance Corporation its Receiver/Manager for a period of twelve (12) months. The appointment also included a declaration of a moratorium on the bank. On the same day, the respondent, on its part, instructed the Nairobi Stock Exchange (NSE) not to proceed with the listing of the bank’s bond issue on the Fixed Income Securities Market Segment until further notice.
Circumstances surrounding the issuance of the bond were brought to the fore by the respondent. In exercise of its statutory authority, it served the petitioners with notices to show cause and required them to respond, within 14 days, to allegations of negligence in the discharge of their mandate as directors of the bank. No hearing took place on the designated day. However, the respondent-appellants claimed that an inquisitorial hearing presided by CMA’s chair took place and a summary ruling entered against the bank’s directors.
The petitioners appealed against that decision at the High Court citing conflict of interest. They said that the CMA had acted as licensee, investigator and judge in the issue of the bond. Additionally, they contended that the authority had acted as juror in its own case. The same officials who had greenlighted the issuance of the bond had gone ahead to rule against its regularity and legality.
At the High Court, the notices sent to the petitioners to show cause were quashed. The court’s reasoning was that there existed a real possibility of bias. By acting in both inquisitorial and enforcement mandate, the authority was likely to be biased. It therefore ought to have delegated its functions to an independent body.
At the Court of Appeal, the authority’s decision was upheld. The Capital Markets Act expressly authorized the overlapping inquisitorial and enforcement functions of the respondent. Therefore, the respondent was expected to make unprejudiced judgement on matters it had investigated.
As a last resort, the appellants called upon the Supreme Court to consider the propriety of the dual statutory mandate granted to the respondent as the sole investigator and enforcer of capital markets infractions in Kenya.
Whether the overlapping investigatory and enforcement roles that the Capital Markets Act vested in the Capital Markets Authority constituted a violation of the rights to fair administrative action and fair hearing as recognized in articles 47(1) and 50(1) (as read with article 25(c)) of the Constitution.
Whether section 11(3) (cc) and 11(3)(h) of the Capital Markets Act which authorized the overlapping investigatory and enforcement mandate of the Capital Markets Authority was unconstitutional.
Whether the Capital Markets Authority’s attempted enforcement proceedings after conduct of its investigatory role with respect to a bank were biased or likely to be biased against the bank.
1. Prior to the enactment of the Capital Markets Act, the capital market in Kenya faced multiple challenges running from illicit intermediaries to lack of a proper legislative guide hence the need for a firm regulatory regime. Sections 5 and 11(cc) of the Capital Markets Act established the Capital Markets Authority with a mandate to remove impediments, promote wider performance of the general public in the securities commodities market and derivatives and for protection of investor interests. To achieve the objectives, section 13 of the Capital Markets Act granted the authority power to discipline errant members and to regulate and facilitate the development of an orderly, fair and efficient capital market.
2. The Capital Markets Authority power to inquire, either on its own motion or at the request of any other person, into the affairs of any person which the authority had approved or to which it had granted a license and any public company the securities of which were publicly offered or traded on an approved securities exchange or on an over the counter market.
3. Tenets of natural justice decreed that, no person should be allowed to be a judge in his or her own cause or in a cause they had an interest in the outcome including situations where one desired or was keen on obtaining a given result. A prosecutor, for example, had an interest in the conviction of a suspect he hauled into court.
4. There were exceptions to every general rule. The exception to the tenets of natural justice set out under article 25(c) as read with article 47 of the Constitution was enunciated in the Canadian case of Re W. D. Latimer Co. and Attorney-General for Ontario (1973), 2 O.R. (2d) 391 and affirmed in Re W. D. Latimer Co. and Bray (1974).
5. Where a statute authorized a tribunal to perform tripartite functions, disqualification on the ground of bias ought to have been founded upon some act of the tribunal going beyond the performance of the duties imposed upon it by the enactment pursuant to which investigations were being conducted.
6. Mere advance information as to the nature of the complaint and the grounds for it was not sufficient to disqualify a tribunal from completing its task.
7. Where it was clear from an empowering legislation that certain activities which would otherwise be considered "biased" formed an integral part of its operations and the tribunal had not acted outside its statutory authority, the doctrine of "reasonable apprehension of bias" could not be sustained. A tribunal’s structure and responsibilities as well as the manner of the discharge of its mandate ought to be considered.
Administrative tribunals were not necessarily supposed to operate like courts of law. That was why they were allowed to be masters of their own procedure albeit having to act fairly as set out in Selvara Jan v. Race Relations Board  1 ALL ER 12.
9. For purposes of efficiency and in the carrying out of the objectives of the Capital Markets Act, especially in the expeditious disposal of disputes that arose in the operations of the capital markets, the functions set out in section 11(3) (cc) and 11(3)(h) could not be performed by separate bodies.
10. Section 11(3)(cc) and 11(3)(h) of the Capital Markets Act were not unconstitutional. The overlapping mandate did not render those sections unconstitutional. What would have been unconstitutional would have been the discharge of that dual mandate.
11. It was important to determine whether the authority’s discharge of a dual mandate in the petitioner’s case was itself likely to be unconstitutional under a critical balancing of articles 47(1) and 50(1).
12. Among the canons of statutory interpretation was that the historical background of legislation ought to be considered. However, in the promotion of public policy and efficient administration of the securities market in Kenya, the right to a fair administrative action could not be sacrificed at the altar of efficiency or public interest.
13. Individual rights to be duly notified of a hearing, given adequate prior information and to be granted a fair hearing were so fundamental that they could not be limited by public interest.
14. The Capital Markets Authority could not be allowed to ride roughshod over the non-derogable constitutional rights of investors. It would be counterproductive by scaring away the very prospective investors it sought to entice.
15. Narrow interests such as fostering investor confidence in the securities market could not be used as an excuse to deprive the directors of their constitutional right to a fair hearing of the allegations against them.
16. Despite the legality of the duality of the respondent’s mandate under section 11(3) (cc) (h) of the Capital Markets Act, in any matter that could be classified as judicial or quasi-judicial, or one where, in the view of a reasonable man conversant with the matter, there was likely to be bias or a reasonable apprehension of bias, the authority ought to have been impartial.
17. A reasonable apprehension of bias was the key test in determining whether a tribunal had acted impartially. A tribunal was required to observe and accord persons under investigations (and or any person) likely to be adversely affected by their decision a fair process and in particular, it was required to adhere to the principles of natural justice and comply with the provisions of articles 50 (1) and 47 of the Constitution.
18. Enforcement proceedings were not necessarily administrative merely because the enforcement body was an administrative one. Focus of the enquiry was not whether a particular conduct was an ‘administrative action’, but on the nature of the power being exercised.
19. An act would be judicial when there was opportunity to be heard and for production and weighing of evidence and a decision was rendered.
20. In the discharge of their statutory mandates, tribunals ought to always first determine whether or not their acts or decisions were judicial or quasi-judicial and whether or not they were likely to adversely affect the rights of persons or bodies under investigation.
21. The nature of the enforcement proceedings that the authority sought to enforce against the directors for non-appearance bespoke a quasi-judicial process because, based on the material evidence placed before it, the Capital Markets Authority would have had to determine the culpability or otherwise of the directors.
22. Had the directors been found culpable pursuant to section 11(3) (cc) of the Capital Markets Act, the authority would have imposed sanctions on them, including financial penalties.
23. There was a real possibility of bias in the petitioners’ case. The authority had appraised and approved the bank’s application. The same authority also initiated and conducted preliminary investigations into the bank’s conduct in relation to the application and upon satisfying itself that the bank could have have violated the relevant provisions of the Act and the Regulations, it made a decision to charge the petitioners and went ahead to formulate the requisite charges. It was the same Board of the Capital Markets Authority that also purported to preside over the hearing of the director’s cases. That obviously led to an inescapable appearance of partiality on the Authority’s part.
The petitioners’ appeal was allowed to the extent that the respondent would proceed with the enforcement proceedings against the petitioners through its delegated authority under section 11A (1) and/or section 14(1) of the Capital Markets Act.
Each party was ordered to bear its own costs.