INSIDE I&M BANK'S 14 RIVERSIDE CORPORATE GOVERNANCE GAMBLE

Background

The 14 Riverside dispute arose after Cape Holdings failed to complete a property sale for which Synergy Industrial Credit had paid approximately Kshs 703 million. This led to an arbitration award of Kshs 1.666 billion plus 18% compound interest, which the Court of Appeal reinstated in November 2020 after it had initially been set aside by the High Court. Shortly afterwards, I&M Bank secured a USD 25 million facility to Cape through a debenture over its assets and later placed the company under administration - a move the High Court found was intended to obtain a moratorium and shield Cape from enforcement. This analysis examines whether I&M's original lending decision was a legitimate exercise of commercial judgment or a failure of due diligence, independence, board oversight, and risk management at a listed bank.

 Tracing the fault line

The central insight, drawn from the infamous corpoarte scandals like Enron, WorldCom, Wells Fargo, HSBC, and GM materials, is that most corporate disasters are made at the front end and discovered at the back end. The visible collapse, the court fight, the administration, the enforcement drama - is a late-stage symptom. The root is a credit facility extended, a transaction structured, a risk accepted, a control bypassed. By the time an institution is in court, the origination decision has already done its work.

 That reframes the I&M position entirely. The administration can be debated as creditor protection vs. governance overreach. But the first step — the lending decision itself — is where the duty of care, the duty of loyalty, and the oversight duty either held or failed. Everything that followed was damage control dressed up as governance.

The duty of care at the lending desk

The infamous case in the circles of corporate governance - In re Citigroup Inc. Shareholder Derivative Litigation at the centre of the duty of care creates the following principle. The principle: directors are protected by the business judgment rule only when the decision was informed. The board must engage with material risks on a record of deliberation — not acquiescence.

 Applied to origination, that test is concrete. A bank discharges its duty of care when it identifies the legal status of the proposed security (title, encumbrances, pending litigation, arbitration); assesses the borrower's litigation exposure, not just its balance sheet; prices the loan for the true risk, including enforcement risk; escalates large or unusual exposures to the risk committee and the board; documents the analysis; and declines, restructures, or seeks additional security where the risk is unacceptable.

 On the public record, the security I&M took was connected to an asset that had been the subject of a Kshs 1.666 billion arbitral award since January 2015, and a public caveat since 2011. The Court of Appeal had reinstated the award on 6 November 2020. The conduct that later drew judicial condemnation was the debenture created on 15 December 2020 — weeks, not years, later. Mabeya J. captured the sequencing in a single line:

 "Less than a month later, in December 2020, the bank and the Company created a debenture the subject of the administration." — Mabeya J., In re Cape Holdings Limited, 10 December 2021

 A risk committee and credit committee that signed off on USD 25 million against this security either saw the risk and accepted it, in which case the risk-appetite statement itself is the governance failure, or did not see it, in which case the Caremark oversight duty was not discharged. There is no third option that reflects well on the bank.

 And then there is the public-warning fact. The dispute had not been hidden. A caveat had been registered on the suit property in 2011; a caveat emptor notice had been published in the Daily Nation the same year. When the question reached the court, the answer was unsparing:

 "The whole world, including the bank, was thereby forewarned about the suit property." — Mabeya J., In re Cape Holdings Limited, 10 December 2021

 That is the due-diligence analysis in a single sentence. After a public caveat and a newspaper warning, no listed bank can credibly say the property history was invisible. The business judgment rule protects informed decisions. It does not protect a decision to look away from a public caveat.

 The loyalty problem, the proximity that sharpens it and the “cartel” concern.

Nairobi's business and community circles recognize a subtext that, while not central to the court's rulings, is widely understood locally: the Shah interests linked to I&M and the Suresh Raja Shah family are regarded as socially and commercially close to the Sanghrajka interests tied to Cape Holdings. However, Social proximity is not evidence of legal wrongdoing, and this analysis does not weigh it as such.

 Proximity matters in governance and this is the distinction the loyalty lens forces. A public-facing bank is not an informal family office. A listed banking ecosystem cannot behave like private social capital. The governance standard for an institution that takes deposits, holds a banking licence, and trades on a public market is institutional independence, not personal discretion.

This is also the disciplined, defensible way to engage a word that gets used loosely in Kenyan public discourse ‘cartel’. The temptation is to read it as a written conspiracy or a smoke-filled-room agreement, and then to dismiss it for lack of proof. But the governance frame asks a different and harder question: whether the system, as it operates, combines social proximity, banking security, corporate vehicles, appointed administrators, legal representation, and procedural delay in a way that makes enforcement brutally uneven without ever requiring an explicit agreement to produce that effect.

 That is what people mean when they talk about cartel-like financial power: not always open illegality, but protected access to machinery that ordinary creditors cannot realistically match. A judgment creditor with a decree and an auction order has one set of tools. A counterparty with a debenture, an administrator, a moratorium, and the procedural runway to litigate each of those for years has a different set entirely. When the two meet over the same asset, and the holders of the second set are socially and commercially close to the judgment debtor, the system produces an outcome that looks engineered even if no single step was individually unlawful.

 The court record already raises the machinery question: Mabeya J.'s language on timing, moratorium, shielding, and conscience does that work. The proximity layer does not add a new accusation; it explains why the machinery worked the way it did, and why it was available when it was. That is a governance concern, not a gossip one. It is the difference between asking "was there a conspiracy?" (unanswerable on this record) and asking "did the structure of relationships and instruments produce an uneven enforcement environment?" (the question the record already invites).

 The duty of loyalty is not a rule against friendship; it is a rule against allowing friendship to substitute for institutional discipline. Where the formal decision is a loan, the substantive question is whether the loan would have been made on the same terms, at the same time, against the same security, to a stranger. If the honest answer is no, the loyalty duty has been compromised and no no degree of procedural formality can sanitize that breach.

The listed-bank stakeholder dimension

Listed financial institutions owe duties beyond the immediate contracting party. Depositors, shareholders, the regulator and the system itself are stakeholders whose interests the governance structure must internalise. A bank is not an ordinary commercial actor, and its risk-taking has externalities.

So the framing that I&M protected Cape Holdings rather than its shareholders and stakeholders is the right frame. The shareholders of a listed bank are exposed to the consequences of every credit decision; depositors rely on the bank's prudence; the regulator relies on the bank's internal discipline. A loan that loads concentrated, litigated-asset risk onto the balance sheet is a transfer of value from those stakeholders to the borrower's owners and if the borrower's owners are themselves close to the bank's decision-makers, the transfer looks like an agency-cost problem.

 The role of regulators

 Under Kenyan law, I&M Bank’s origination step triggers strict prudential scrutiny regarding board oversight and collateral risk. Under CBK/PG/01 (Corporate Governance), Clause 3.1.2 mandates comprehensive due diligence and a defined risk appetite, while Clause 3.2.1 enforces the Duty of Care and Skill. Extending a USD 25 million facility against an asset burdened by a public caveat and a Kshs 1.6 billion arbitral dispute forces regulators to ask whether the Board Risk and Credit Committees ignored the legal peril or deliberately elected to override it. Furthermore, under CBK/PG/02 (Asset Classification and Provisioning), loans must be backed by legally unencumbered, realistic collateral; writing this contested facility onto the books without strict provisioning for the underlying litigation risks falling foul of CBK standards for substandard or doubtful assets.

 The transaction also faces regulatory exposure regarding the bank's commercial proximity to the borrower under CBK/PG/08 (Insider Lending and Related Party Transactions). Section 11(1) of the Banking Act strictly prohibits granting advances to affiliated parties unless they are fully secured and on arm's-length terms. Even if the borrower technically escapes the strict definition of an "insider," Clause 3.2 of CBK/PG/08 limits exposures to "Related Parties" and mandates that such facilities carry no more risk than a loan to a total stranger. Taking a debenture over a property already encumbered by a decade-long legal war fundamentally fails this arm’s-length market test, as no bank would unconditionally extend USD 25 million to an unaffiliated stranger over an actively combated asset.

 Finally, as a publicly listed entity, I&M Holdings Plc is subject to strict market transparency rules under the Capital Markets Authority (CMA). Regulation 19 of the Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations, 2002 imposes a continuous duty to disclose material information that could affect share prices. Synergy’s reported Kshs 5.77 billion Marex tort claim against the bank for frustrating the decree, combined with the sharp judicial condemnation of the bank’s administration manoeuvres, constitutes highly material information. Under the CMA Code of Corporate Governance Practices (2015), the Board’s Audit and Risk Committees must explicitly disclose significant legal and conflict risks; failing to notify the market of this multi-billion-shilling contingent liability represents a standalone disclosure violation, entirely independent of the loan's initial credit quality

 Conclusion

The administration was the noise. The signal is the origination: a listed bank taking a USD 25 million debenture over an asset that was publicly caveated, arbitral-award-bearing, and freshly reinstated by the Court of Appeal within weeks of that reinstatement projects the antithesis of sound corporate governance, compliance and risk management.

 The courts decide the civil fight between Synergy and Cape. The regulators are the ones who can decide whether I&M's original choice was a credit decision or a loyalty failure.

Authored by: Abdiaziz Guhad Muhammad