SMALL ENTERPRISES DEVELOPMENT CORP v PAPERSALES & SERVICES (PVT) LTD & ORS 1998 (2) ZLR 584 (H)

Flynote

Company — shares — loan for purchase of — scheme whereby loan advanced to company which enabled new shareholders to purchase shares, assets and goodwill — not prohibited under Companies Act

Headnote

The second and third defendants negotiated with the previous shareholders in the first defendant company to buy the shares owned by the previous shareholders. The plaintiff company lent a sum of money to the first defendant to enable them to do so. The loan funds were paid directly to the sellers. The result of the transaction was that the second and third defendants purchased all the shares in the first defendant, and the owners of 50 paid of shares of $1 each. The balance of the loan of some $123 000 was used to pay for the assets and goodwill of the company.

When the company got into financial difficulties, the plaintiff sought to recover the loan, plus interest. The suit was resisted on the grounds that the transaction had been unlawful, it being alleged that it contravened s 78 of the Companies Act [Chapter 24:12] as it was a loan to the first defendant for the purchase of shares in itself.

Held, that the true purpose of the loan was to enable the second and third defendants to purchase the company as a going concern, on the basis of the value of its assets plus goodwill. It was not for the purchase of its shares, which had a nominal value only. In any event, the object of s 78 was to ensure that purchasers of shares pay for their shares, not to prohibit quite innocent transactions.