AFRICAN RESOURCES LTD & ORS v GWARADZIMBA NO & ORS 2011 (1) ZLR 105 (S)

Flynote

Constitutional law — Constitution of Zimbabwe — Declaration of Rights — s 16 (provision against compulsory acquisition of property without D compensation) — reconstruction order under Reconstruction of State-Indebted Insolvent Companies Act [Chapter 24:27] — appointment of administrator and effect of powers given to administrator of affected company — such not amounting to acquisition of company or any of its assets or any share issued by company

Constitutional law — Constitution of Zimbabwe — Declaration of Rights — s 18(9) — right to protection of the law — reconstruction order under Reconstruction of State-Indebted Insolvent Companies Act [Chapter 24:27] — need for such order to be confirmed by a judge — s 18(9) not contravened

Constitutional law — Constitution of Zimbabwe — Declaration of Rights — s 24 — application for redress — allegation that Minister did not observe audi alteram partem requirement — not a constitutional matter — should be dealt with on review

Constitutional law — Constitution of Zimbabwe — Declaration of Rights — s 24 — application for redress — need to itemise what provisions of G legislation are being challenged — not enough to allege that entire statute is in contravention of Declaration of Rights

Constitutional law — Constitution of Zimbabwe — Declaration of Rights — s 24 — application for redress — when may be brought — pending matter in another court — unless constitutional question in issue in other court, H application under s 24(1) permissible

Practice and procedure — affidavit — founding affidavit — contents and purpose of — should set out facts succinctly — voluminous and argumentative affidavits not in compliance with rules of court

Practice and procedure — affidavit — validity — affidavit deposed to by a person under a legal disability — such affidavit void

Statutes — Reconstruction of State-Indebted Insolvent Companies Act [Chapter 24:27] — ss 4, 6, 12, 13, 18, 21, 22, 23, 25, 29, 30 and 31 not in contravention of ss 16 and 18 of the Constitution

Headnote

The first applicant, a company incorporated in the British Virgin Islands, was the sole shareholder of the second applicant, which in turn was thesole beneficial shareholder of SMM Holdings (Pvt) Ltd ("SMMZ"), a company incorporated in Zimbabwe. All these companies were under the sole beneficial shareholding and control of Mr Mutumwa Mawere. In July 2004 Mr Mawere was declared a specified person in terms of s 6(1) of the Prevention of Corruption Act [Chapter 9:16]; the second applicant was specified a month later. The effect of the specification order, as provided under s 10(1) of the Act, was that Mr Mawere could not perform any act as a director of the applicants or as their agent without the approval of the investigator assigned to him in terms of s 7 of the Act.

In September 2004 a reconstruction order was issued in respect of SMMZ by the third respondent, the Minister of Justice, initially in terms of temporary legislation; the order was confirmed by the Reconstruction of State-Indebted Insolvent Companies Act [Chapter 24:27] ("the Act"). The purpose of the legislation was to make provision for placing under reconstruction a company and its associates which, whilst indebted to the State, was unable, or unlikely to be able, to make repayment of the credit made to it from public funds on a date when repayment was due by reason of fraud, mismanagement or for any other reason. It had to further appear to the Minister that the State-indebted company had not become, or was prevented from becoming, a successful concern and that there was a reasonable probability that if the company was placed under reconstruction, it would be enabled to pay its debts or meet its obligations and become a successful concern and that it would be just and equitable to place the company under reconstruction. By reason of the definition of "associate" in the legislation, all three applicants were deemed to have been placed under reconstruction in terms of the order issued in relation to SMMZ. The effect of the reconstruction order was to divest any other person vested with the management of the company's affairs from the date of its commencement and vesting such control and management of the company in an administrator appointed by the Minister. The applicants brought an application under s 24(1) of the Constitution, alleging that the Act violated ss 16(1)(b), (c) and (d) and 18(9) of the Constitution, in that it permitted the State to expropriate property without notice, payment of fair compensation or judicial oversight and denied persons subject to it access to the courts.

In limine, the respondents argued that the same questions forming the subject-matter of the application arose in proceedings in the High Court. Accordingly, the applicants ought to have requested the judge, in terms of s 24(2) of the Constitution, to refer the questions to the Supreme Court for determination. It was argued that, as no reference of the questions was made, the application in terms of s 24(1) was prohibited by s 24(3).

The applicants did not specify the impugned sections of the Act in the founding affidavit or in the draft order but in argument it was alleged that ss 4, 6, 12, 13, 18, 21, 22, 23, 25, 29, 30 and 31 of the Act contravened the Declaration of Rights. The main thrust of their case was that the Act was intended to enable the State to acquire compulsorily property belonging to companies indebted to the State or the shareholders of such companies. They also complained of the failure by the respondents to observe the audi alteram partem principle. The applicants' affidavits were voluminous and replete with argumentative and irrelevant matters. The founding affidavit and its annexures ran into some 400 pages, while the whole application ran into some 1000 pages.

Held, that in each of the cases in the High Court the affidavits which averred that the relevant provisions of the Act contravened ss 16 and 18(9) of the Constitution were deposed to by Mr Mawere. As Mr Mawere was a specified person with no legal capacity to litigate in matters involving the affairs of the companies under reconstruction without the approval of his investigator (which approval he had not obtained), the affidavits were null and void and accordingly the constitutional questions raised in them fell away. Accordingly, it was still competent for the applicants to proceed in terms of s 24(1).

Held, further, that the purpose of founding affidavits is to set out succinctly the facts that form the basis of the cause of action. The litigant's legalpractitioner should ensure that affidavits filed of record comply with the Rules. It is irresponsible and unprofessional for a legal practitioner simply to reproduce as affidavits the statements the litigant makes to his legal practitioner. Persistence with this type of pleading may lead to the court awarding costs de bonis propriis against the offending legalpractitioner.

Held, further, that, when the Supreme Court sits as a constitutional court, it only considers constitutional issues. The alleged failure by the respondents to observe the audi alteram partem principle was an issue for review. It had no relevance to the constitutional issue.

Held, further, that the purpose and intent of the Act is to prevent loss of public funds through fraudulent, grossly negligent or reckless management of companies indebted to the State. Essentially, the Act is about the replacement of failed management of a State-indebted company with new management capable of turning around the fortunes of the company and enabling the State-indebted company to meet its obligations. Such legislation is not unique to Zimbabwe. In relation to companies, the word "reconstruction" has a fairly precise meaning: it denotes the transfer ofthe undertaking or part of the undertaking of an existing company to a new company with substantially the same persons as members as were members of the old company. Substantially, the business and the persons interested must be the same.

Held, further, that s 4 of the Act sets out the juristic facts that have to be in existence before the Minister can issue an order for reconstruction. Unless those facts exist, an order may not be issued. The section does not provide for compulsory acquisition of property, even bearing in mind the very wide meaning of "property" in s 16 of the Constitution. The Act provides a scheme, not to provide for the temporary or permanent acquisition of property, but rather to provide for the change of management of a company by providing for the removal of management that has failed to manage the company successfully in order to enable it to discharge its liabilities. Section 4 provides for the appointment of the administrator to manage the affairs of the company placed under reconstruction. Management of a company is not an asset or property of a company or the shareholders; it is a mode or method of running the affairs of a company. All the assets of the company remain the assets of the company. The shares remain the property of the shareholders. Nothing is acquired, either temporarily or permanently. All that happens as a result of a reconstruction order being issued is that there is a change in the management of the company. The confirmation proceedings stipulated in s 4 provide for both judicial oversight and an opportunity for the interested parties to be heard. This adequately meets the requirements of ss 16 and 18(9) of the Constitution.

Held, further, that s 6 of the Act confers on the administrator the control and management of the company and authority to take or recover possession of all the assets of the company. It also authorises the administrator, as the new manager of the company, to litigate on behalf of the company and to defend actions on behalf of the company. Acquiring the authority to sue or be sued as a representative of a company does not constitute compulsory acquisition of property of the company at all or as envisaged by s 16 of the Constitution.

Held, further, that s 12 of the Act empowers the administrator to deal with the property of "culpable persons", who are, in terms of s 10 of the Act, persons who were knowingly a party to the carrying on of the business of the company (a) recklessly; or (b) with gross negligence; or (c) with intent to defraud any person or for any fraudulent purpose. Section 12(1) authorises the administrator to cancel a share or nullify any share, right or interest in or claim upon a company under reconstruction held by a culpable person obtained as a result of fraud committed by that person. Property acquired by fraud is unlawfully owned and s 16 of the Constitution was not intended to promote fraud and protect property acquired through fraud. The issuing of shares and the offering of such shares by the manager of a company to a creditor of a company in settlement of the debt owed to the recipient of the shares in an effort to turn around a company is not compulsory acquisition. It is essentially a settlement of a debt by the issuance of shares that are not owned by any shareholder. Held, further, that the general powers conferred on the administrator in terms of s 18 of the Act are conferred on the administrator for the purpose of acting for and on behalf of the company under reconstruction, to enable the administrator to run the affairs of the company, with a view to turning it around. The section does not compulsorily acquire any asset of the company from the company and allocate it either to the State or to any other person. Whatever is sold in terms of the section is done for and on behalf of the company and for the benefit of the company. Administering the company does not constitute acquiring that company.

Held, further, that s 23 of the Act empowers the administrator to issue shares or securities in the company under reconstruction in satisfaction of any credit owed to the State or any payment by the State in terms of a guarantee on behalf of the company under reconstruction. The issuing of those shares does not involve the acquisition of the shares from anybody. They are shares issued by the administrator as a set off to what the State would have paid on behalf of the company. The rest of the powers outlined in the section are incidental to the management of a company for the purposes of turning it around, a process similar to the provisions relating to judicial management in the Companies Act [Chapter 24:03].

Held, further, that s 25 of the Act merely provides that where the intended object of the reconstruction is not achievable, that is to say, if it becomes apparent that it is not possible to turn around the company without advancing additional public funds to it and such funds are not available or the reconstruction scheme has been rejected by creditors and members, the provisions of the Companies Act shall apply. In other words, the company is forced into liquidation and is liquidated in terms of the Companies Act.