Court okays auction of Chase Bank property over Sh1.3 billion debt

The Court of Appeal has given Equity Bank Kenya a green light to auction the former Chase Bank headquarters, in order to recover a Sh1.3 billion debt stemming from the bank's fraud scandals.

Judges Daniel Musinga, Justice Mumbi Ngugi and Justice George Odunga dismissed an application by Chase Bank's liquidator, the Kenya Deposit Insurance Corporation (KDIC), that sought to block the auction of the Riverside Office Block pending appeal.

"We are satisfied that the appeal, if successful, shall not be rendered nugatory. As the applicant has not satisfied both limbs under rule 5(2)(b) of this Court's Rules, we hereby dismiss this application with costs to the respondent," Justice Musinga-led bench ruled.

Chase Bank was placed under receivership by the Central Bank of Kenya on April 7, 2016, after it spectacularly failed to meet its financial obligations.

The Kenya Deposit Insurance Corporation was appointed as the liquidator in April 2021.

A forensic audit of the bank's general ledger allegedly revealed that approximately Sh7.5 billion of depositors' funds had been diverted by former directors and senior management led by its ex-Chairman Zafrullah Khan, to acquire assets through special purpose vehicles (SPVs)

One such vehicle was Riverside Mews Limited, the registered owner of the Riverside Office Block, a prestigious commercial property sitting on L.R. No. 4275/13 in Nairobi's upmarket Riverside Drive neighbourhood.

Zafrullah and other former directors were subsequently sued by KDIC in High Court proceedings in 2017, where the liquidator sought declarations that the assets held by the SPVs, including the Riverside Office Block, beneficially belonged to Chase Bank.

An injunction was issued by the High Court in April 2017, freezing dealings in those assets pending the determination of the suit.

While the recovery battle was unfolding in court, it emerged that Equity Bank had advanced a $9.5 million (Sh1.23 billion) loan facility to Riverside Mews Limited, the SPV allegedly used to park stolen funds, secured by a registered charge over the very same Riverside Office Block, plus a deed of assignment over its rental income.

With the debt now converted to Kenya Shillings and interest raised to nearly 21 per cent per annum, the outstanding balance has ballooned to over Sh 1.3 billion.

KDIC, stepping into the role of property manager, had been collecting rental income from the building and channelling it towards servicing the Equity Bank loan.

Evidence tendered in court shows that the two institutions even executed a letter of variation in October 2021, restructuring repayment terms, with KDIC actively participating as de facto borrower.

The arrangement unravelled in 2024 when Equity Bank allegedly converted the loan from US Dollars to Kenya Shillings at an exchange rate of Sh145.50 to the dollar, simultaneously raising the interest rate from 8 per cent to nearly 21 per cent per annum.

KDIC claimed this was done without adequate notice, causing monthly installments to balloon sharply.

By June 23 last year, Equity Bank had issued a formal redemption notice, setting in motion the statutory process to sell the property.

KDIC rushed to the High Court seeking an injunction to halt the auction, arguing that the property formed part of assets under active recovery in the Zafrullah Khan suit and that proper statutory notices under the Land Act had not been served on KDIC despite its court-sanctioned management role. It also alleged that the interest rate and currency conversion amounted to an unlawful variation of the facility terms.

The High Court dismissed the application, finding that Equity Bank held a superior registered charge, that the Riverside Office Block was not expressly listed in the Declaration of Trust signed by former directors, and that the interest rate variation was contractually permitted.

The existing injunction, the court held, could not override a secured creditor's statutory power of sale.

At the appellate court, Chase Bank's Senior Counsel George Oraro mounted a spirited challenge, arguing the appeal raised weighty questions, among them whether trust interests constitute overriding interests under the Land Registration Act, whether Equity Bank was estopped from denying KDIC's authority after years of dealing with it directly, and whether the near-tripling of interest rates amounted to an unlawful clog on the equity of redemption.

The three-judge bench acknowledged that the appeal raised at least one genuinely arguable issue, satisfying the first legal hurdle.

However, the court found Chase Bank fell short on the second and decisive test on whether the appeal would be rendered meaningless if the auction proceeded.

The judges noted that Equity Bank, as a tier-one financial institution, was fully capable of compensating Chase Bank for any losses should the appeal eventually succeed.

"If realisation of the security is delayed any further, the outstanding sum may outstrip the value of the suit property," the judges warned, noting this would not serve any of the parties' interests.

More pointedly, the appellate court judges warned that with the outstanding debt already exceeding Sh1.3 billion and continuing to accumulate interest daily, further delay risked the debt outgrowing the property's value entirely, an outcome, the bench noted, would serve nobody's interests.

The suit against Zafrullah Khan and other former Chase Bank officials, at the heart of the Sh7.5 billion depositors' funds scandal, continues separately before the High Court.