MAFUSIRE J: Paragraph (b) of s 6 of the Reconstruction of
State-Indebted Insolvent Companies Act, Cap 24:27 (“hereafter referred
to as the Reconstruction Act”), provides that no action or
proceeding shall proceed or commence against a company subject to a
reconstruction order except by leave of the administrator and subject to such
terms as he may impose.
Paragraph (c) voids any attachment or execution of property
put in force against the assets of the company after the commencement of a
reconstruction order. Paragraph (d) also voids, inter alia, every
disposition of the property of the company, including rights of action, unless
the administrator orders otherwise.
SMM Holdings (Private) Limited (“SMM Holdings”)
was a company under a reconstruction order. A reconstruction order is issued by
the Minister of Justice (“the Minister”) in terms of the
Reconstruction Act. It is issued against a company that is indebted to the
State or to a statutory corporation or a State-controlled company through
credits or guarantees received by that entity or in its favour and that are
payable out of public funds or that impose any liability on the State[1]. The
reconstruction order is issued if it appears to the Minister that by reason of
fraud, mismanagement or for any other cause the company is unable or is
unlikely to repay and the State has become or is likely to become liable to pay
from public funds. The order is issued if it also appears to the Minister that
the State-indebted company has not become, or is prevented from becoming a
successful concern and that there is a reasonable probability that the company
will be able to pay its debts or meet its obligations and become a successful
concern if it is placed under reconstruction and that it would be just and
equitable to do so.
“Essentially, the Act is about 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.”[2]
SMM Holdings was also indebted to the applicant, a South
African registered company. The amount of the debt was in excess of US$3.6
million. The debt was admitted. It was the total of two loans advanced by the
applicant to the administrator on behalf of SMM Holdings. The loans had been
advanced after the reconstruction order. The administrator had secured the
loans to pay SMM Holdings' suppliers in South Africa. This had been intended to
keep the company afloat. The company was a mining concern that produced
asbestos fibre. Repayment of the loans would be through its products. The
company would sell its asbestos fibre to the applicant. From it applicant would
retain an amount equivalent to 40% of each invoice. The loan tenure was 28
February 2010. SMM Holdings was in breach of the loan terms. Applicant demanded
payment. SMM Holdings failed to pay. All this was common cause.
In line with the provisions of s 6 of the Reconstruction
Act the applicant sought the leave of the administrator to sue SMM Holdings for
the recovery of the loans and the interest accrued. The leave was turned down.
The reasons were stated in a letter by respondent's legal practitioners dated
28 August 2012. They were as follows:
“SMM was placed under reconstruction in September 2004 as a
result of problems arising out of mismanagement and accumulating debt to the
State. The Administrator was tasked with resuscitation of the mines. However,
since 2004, multiple legal battles were instigated by the former board members
and beneficial Shareholders of SMM. These legal battles disrupted the
Administrator's efforts. In recent months, most of the cases were finally
determined and the Administrator is now focusing on identifying potential
investors. SMM currently owes several suppliers debts, some of which are in
excess of what is owed to your client. To allow your client to institute legal
proceedings at this stage will be opening a pandora's box. The Administrator is
aware of SMM's obligations to your client and assures us that as soon as
funding is in place, your client's matter will be addressed. Accordingly, for
the reasons set out above, the request is declined.”
Two months later the applicant brought these proceedings.
It applied for an order overriding the respondent's decision and granting the
leave to sue.
Part of Mr de Bourbon's argument, on behalf of the
applicant, and as I understood it, was that the applicant's loans to SMM
Holdings should be treated preferentially. Whilst the pre-reconstruction loans
had been incurred by the failed management of the company the applicant's loans
had been incurred by the administrator himself. They were ordinary commercial
loans. They had been meant to ensure that the company would trade out of its
difficulties and be able to re-pay its pre-reconstruction obligations. As such
the applicant should not suffer the restrictions of s 6(b) of the
Reconstruction Act.
Mr de Bourbon also submitted that it had not been
part of the terms of the borrowing that repayment would be dependent upon new
shareholders injecting new capital into the company.
As I perceived it, the applicant's main case was that the
decision by the administrator to decline leave hadbeen grossly wrong. The
decision had been concerned with self-preservation of the administrator's own
position and not with considerations of fairness. Reference was made to the
recent and yet to be published judgment by MATHONSI J in the case of Gurta
AG v Afaras Mtausi Gwaradzimba NO HH 353-13.
Gurta'scase concerned the
same respondent as in this case. It concerned the same company and the same
relief. The respondent in that case had sold certain mining claims to the
applicant, a foreign company incorporated in Switzerland. A third party had
claimed them. He had used all manner of means to evict the applicant. The
applicant had sought the leave of the administrator to institute proceedings
against SMM Holdings for the cancellation of the sale agreement and for a
refund of the purchase price. The leave had been refused. MATHONSI J granted
it.
In casuthe applicant's
fall-back position, as it had been in the Gurta case, was that s 6 of
the Reconstruction Act is ultra vires the Constitution of Zimbabwe.
Thus, in spite of the decision of the Supreme Court in African Resources
Ltd & Ors vGwaradzimba NO & Ors 2011 (1) ZLR 105 (S)
declaring that s 6 of the Reconstruction Act does not violate the Constitution,
and in spite of the decision by MATHONSI J in the Gurta case on the
constitutional point to the effect that given that the case had to be dealt
with in accordance with the old Constitution which had removed the jurisdiction
of this court to strike down existing legislation, reposing such power in the
Constitutional Court, Mr de Bourbon nevertheless argued that the
constitutionality of s 6 of the Reconstruction Act was still an open point. He
submitted that the African Resources case was distinguishable. The
particular problem confronting this court in this matter was not what their
lordships in the Supreme Court had been called upon to exercise their minds on.
They had been concerned merely with the constitutional validity of legislation
in relation to a reconstruction order and not with the exercise by an
administrator of a power under section 6(b) of the Reconstruction Act.
With regards to the Gurta case, Mr de Bourbon
submitted that it appeared that the Honourable MATHONSI J had not been referred
to s 85 of the new Constitution. This section empowers every court to grant
relief in relation to a breach of fundamental rights or freedoms which are
enshrined in the Constitution. Specifically, subsection (2) of s 85 of the
Constitution requires the rules of a court to facilitate access to, and the
determination of such matters with minimal technicalities.
The precise constitutional point raised by the applicant in
this matter as an alternative argument was that s 6(b) of the Reconstruction
Act purports to prevent access to the courts in contravention of s 69(3) of the
Constitution which reads:
“Every person has the right of access to the courts, or
some other tribunal or forum established by law for the resolution of any
dispute.”
In a nutshell, that was the applicant's case.
In opposing the application the respondent first took a
technical objection. It was argued that the application being in terms of the
Administrative Justice Act, and that this Act being a codification of the
common law remedy for review[3] it was
incumbent upon the applicant to have brought itself squarely within the ambit
of reviews, either in terms of the common law or in terms of the Administrative
Justice Act. It was argued that the application failed to satisfy the requirements
for review.
Respondent also argued that the applicant sought a
substantive relief. The court was being asked to effectively usurp the
functions of an administrative authority by granting the leave that the
respondent had turned down. This was said to be contrary to administrative law.
Reference was made to the cases of Mhanyami Fishing & Transport
Co-operative Society Limited & Ors vThe Director General Parks and
Wildlife Management Authority NO & Ors HH92-11 and Affretair (Pvt)
Ltd & Anor v M K Airlines (Pvt) Ltd 1996 (2) 15 (S).
The respondent's next argument was that his refusal to
grant leave had not been grossly unreasonable. His decision could only be set
aside if it was so grossly unreasonable as to be irrational in the Wednesbury
sense, that is to say, a decision so grossly irrational as to be outrageous in
its defiance of logic or of accepted moral standards that no sensible person
who had applied his mind to the issue to be decided could have arrived at it[4].
Finally, the respondent argued that in the light of Africa
Resources, a decision of a superior court, in which it was decided that s
6 of the Reconstruction Act does not violate the Constitution, this court,
being inferior, had no choice but to follow that decision.
Mr Mpofu, for the respondent submitted that the
applicant's loans did not deserve preferential treatment. On the contrary they
should rank lower. The applicant had advanced them well knowing the precarious
financial position of the company and had therefore taken a well calculated
risk.
On Gurta's case, Mr Mpofu submitted
that the last word regarding the constitutionality or otherwise of s 6(b) of
the Reconstructive Act had not yet been spoken. The Gurta judgment had
been appealed against. Both counsel were set to argue the appeal in the Supreme
Court on the following day[5].
Aside from the constitutional point, in my view the
substantive issue before me was the extent to which the respondent could
exercise the discretion bestowed on him by s 6(b) of the Reconstruction Act.
What factors ought he take into account? What factors ought he not take into
account?
According to Mr de Bourbon, an administrator of a
company under reconstruction to whom leave to sue is sought should only have
regard to the following factors:
1
whether the proposed claim is bona fide or is simply intended to
harass the administrator or to improperly interfere with his administration of
the company;
2
whether the cause of action arose prior to the reconstruction order or after;
3
whether the administrator himself was responsible for incurring the liability
that is sought to be enforced in the legal proceedings;
4
whether the claim made is admitted;
5
whether any culpable person was involved in the facts giving rise to the cause
of action;
6
whether an applicant, given the known history of the company under
reconstruction, should as a matter of policy be deprived of the right to sue.
Other than the first criterion postulated by counsel I find
the rest of them somewhat narrow. They seem tailor-made to suit the particular
circumstances of the applicant in this case. One is mindful of the dangers of
being too prescriptive and of trying to lay down a one-size-fit-all criterion.
I am content to accept that in deciding whether or not to
grant leave under s 6(b) of the Reconstruction Act, an administrator of a
State-indebted company must consider whether the proposed claim is bona
fide or is simply intended to harass him or to improperly interfere with
his administration of the company. A court reviewing the decision of the administrator
will, in my view, scrutinise it on such broad terms as such decisions are
generally scrutinised in the field of administrative law.
An administrator of a company under reconstruction in terms
of the Reconstructive Act whose leave is sought to institute legal proceedings
against the company in terms of s 6 (b) of that Act must act in accordance with
s 3 of the Administrative Justice Act, particularly subsection (1)(a) thereof.
He must act reasonably and in a fair manner. His decision must not be whimsical
or capricious. He must not advance self-interests otherwise his decision will
be unfair. Whilst his paramount consideration is to turn around the fortunes of
the company and bring it out of the financial doldrums so as to free the State
from any obligation to pay, that cannot be his singular consideration. He must
not be blind to the interests of the other stakeholders in the company
otherwise his efforts may produce unintended results. He must strive to strike
a balance.
When a person is appointed an administrator of a
State-indebted company and clothed with the powers of paragraphs (b) and (d) of
s 6 of the Reconstruction Act, he is, in a sense, being empowered and
authorised to be judge over his own cause. All control and management of the company
is vested in him. He decides for and on behalf of the company. He is the face
of the company. He is the brains and soul of the company. He must know what is
good for the company. But in spite of all that he must remain objective.
Section 6(b) of the Reconstructive Act gives no suggestion
as to how an administrator should treat the pre- and post-
reconstructionobligations. However, it seems to me that in general both the
pre- and post- reconstruction obligations should be accorded equal treatment.
But circumstances might arise when they may be treated differently. Every case
will have to be considered on its own set of circumstances. In my view it
should not be the date when a particular debt was incurred that must decide
preferential treatment or otherwise. Rather it should bethe circumstances
surrounding theparticular debt.
In the present matter SMM Holdings had been under a
reconstruction order because it was indebted to the State. The Minister must
have been satisfied that the company's management had been fraudulent,
negligent or guilty of some such serious infraction. The respondent had been
appointed administrator. His duty was to turn it around so that it would be
able to repay its debt and free the State from the obligation to utilise public
funds. He had to return the company to profitability. From the respondent's
lawyer's letter of 28 August 2012 it was not only the debt to the State that
the company had been saddled with. It was said there were other debts
much bigger in size than the applicant's loans. That was the state of affairs
when the respondent had taken over.
In his wisdom the respondent had borrowed from the
applicant. As his general powers of administration in relation to a company
under reconstruction he had had such power to raise money in any way in terms s
18(d) of the Reconstruction Act. When he borrowed from the applicant the
purpose had been to ensure that the company continued to produce and to trade.
From the loan terms not only would the company be able to repay the applicant's
loans, but also itwould remain with 60% of the proceeds from its products to
utilise for other purposes. But from the papers and from the submissions during
the hearing, it appeared that the company, under the control and management of
the same respondent, who himself had incurred the debt, albeit on behalf of the
company, had neither kept the arrangement of supplying the company's products
to the applicant nor repaid the loans by due date. The applicant became
entitled to sue the company. But the law said it must first get permission from
the respondent. The respondent refused that permission despite acknowledging
the debt, and, tacitly, the breach. His fear had been that the
applicant's suit would open up the floodgates, a Pandora's Box, as his lawyers
had put it.
There is something in the respondent's conduct that offends
against notions of justice and fair play in the minds of reasonable men. There
is something callous in the submission that the applicant was not entitled to
cry foul when it had got, as it were, its fingers burnt allegedly because it
had entered into the loan arrangements with its eyes wide open. Yet it had been
the respondent himself, not the failed management of the past, who had brought
about the state of affairs giving rise to the debt due to the applicant. In my
view, his decision to refuse the leave hadclassicallybeen concerned with
self-preservation. It hadevidently been designed to shield himself from the
consequences of his own infractions. That was wrong. That was unreasonable.
That was unfair. That was in breach of s 3 of the Administrative Justice Act.
For that reason I set aside the respondent's decision.
I should not concern myself with whether or not the
decision of the respondent in turning down the applicant's request for leave to
institute proceedings for the recovery of its loans was grossly unreasonable in
the Wednesbury sense. I am satisfied that in coming up with his
decision the applicant had failed to leave up to the principles set out in s
3(a) of the Administrative Justice Act.
The respondent argued that it was not competent for this
court to usurp the function of an administrative authority by, in this case,
granting the leave that the respondent ought to have granted. It was pointed
out that in terms of s 4 of the Administrative Justice Act, the courses open to
the court are to set aside or confirm the decision or to refer the matter back
to the administrative authority or to give appropriate directions to the
administrative authority.
I was urged to follow the approach of MAKONI J in the Mhanyami
Fishing case. In that case the learned judge declined to grant the fishing
licences that the applicants had clamoured for. She had felt that to do so
would be tantamount to substituting the decision of the court for that of the
administrative functionary.
The approach in such matters was set out by McNALLY JA in
the Affretair case. Quoting from BAXTER Administrative Law,
at p 681, the learned judge of appeal said[6]:
“The function of judicial review is to scrutinize the
legality of administrative action, not to secure a decision by a judge in place
of an administrator. As a general principle, the courts will not attempt to
substitute their own decision for that of the public authority; if an
administrative decision is found to be ultra vires the court will
usually set it aside and refer the matter back to the authority for a fresh
decision. To do otherwise 'would constitute an unwarranted usurpation of the
powers entrusted [to the public authority] by the Legislator'. Thus it is said
that: '[t]he ordinary course is to refer back because the Court is slow to
assume a discretion which has by statute been entrusted to another tribunal or
functionary. In exceptional circumstances this principle will be departed from.
The overriding principle is that of fairness.”
It is not an absolute position that a court will not
substitute its own decision for that of the administrative functionary. In
exceptional circumstances it will. Section 4 of the Administrative Justice Act
does not lay down an absolute course of action that the court should follow. It
gives broad guidelines. The list of those guidelines, in subsection (2),cannot
be said to be exhaustive. In subsection (1) the right to a recourse that an
aggrieved party may seek from this court in terms of that section is made
subject to that Act “and any other law”. Furthermore, the court
may follow any of the courses suggested in subsection (2) only in “appropriate”
circumstances.
A court will substitute its own decision for that of the
administrative functionary in exceptional circumstances. There are four
criteria. These were discussed by McNALLY JA in the Affretair case[7] and aptly
summarised by MATHONSI J in the Gurta case[8]. They are:
1 where the end
result is a foregone conclusion and it would be a waste of time to refer the
matter back;
2 where further
delay could prejudice the applicant;
3 where the
extent of bias or incompetence is such that it would be unfair to the applicant
to force it to submit to the same jurisdiction;
4 where the court
is in as good a position as the administrative body to make the decision.
The Mhanyami Fishing case is clearly
distinguishable from this one. In that case the court dismissed the application
on the basis of the points raised in limine. Oneof themwas the
question of whether or not the court could substitute its own decision for that
of the administrative functionary. The court held that it could not. In my view,
and with due respect,the court was quite correct. There had simply been no
sufficient information laid before it to grant the licences sought.
In the Gurta case the court granted the leave to
institute legal proceedings under s 6(b) of the Reconstructive Act. It found
that all the four criteria above existed. Again that decision was, with due
respect, also correct.
In casuI consider that the
applicant's case is even stronger than that of the applicant in the Gurta
case. Among other things, in the Gurta case the respondent had
declined leave because he had perceived that he had some kind of defence to the
proposed action. That was an improper exercise of discretion. In the present
case, the respondent admitted the debt. All the facts germane to the issue were
common cause. The respondent acknowledged the applicant's right to be paid.
Part of the letter of 28 August 2012 reads: “The Administrator is aware
of SMM's obligations to your client and assures us that as soon as funding is
in place, your client's matter will be addressed. Accordingly, for the reasons
set out above, the request is declined.” Thus he had no defence to the
claim. Leave was refused for fear that a suit by the applicant would trigger
several other suits by other creditors. That was an improper exercise of
discretion.
Just as in the Gurta case, I am satisfied that the
applicant in casu has met all the criteria for this court to take the
exceptional step to substitute its own decision for that of the respondent. It
will be a waste of time to refer the matter back to the respondent. The delay
will prejudice the applicant. These were commercial loans. Delays are
undoubtedly prejudicial even without considering the question of the
prescription of debts. Most importantly, the court is in as good a position as
the respondent to make the decision. It is not fettered by self-serving
interests as the administrator undoubtedly was. That the applicant's litigation
may open what the respondent termed “a Pandora's Box” was not a relevant
consideration. Section 6 (b) of the Reconstruction Act was evidently not
designed to provide an administrator of State-indebted companies some form of
immunity from civil suits. In terms of s 18(1)(e) the administrator is
authorised and empowered, among other things, to defend legal proceedings of a
civil nature on behalf of the company. He is also authorised and empowered, in
terms paragraph (g) of subsection (1) of s 18, inter alia, to
compromise or admit any claim or demand against the company.
In the premises I grant the leave sought by the applicant under s 6(b) of the
Reconstruction Act.
Having reached a decision on the substantive claim I find
it unnecessary to deal with the constitutionality of s 6(b) of the
Reconstruction Act.
DISPOSITION
It is ordered that:
1.
The decision of the respondent on 28 August 2012 refusing the request by the
applicant in terms of s 6(b) of the Reconstruction of State Indebted Insolvent
Companies Act, [Cap 24:27]for leave to institute civil proceedings
against SMM Holdings (Private) Limited is hereby set aside.
2.
The applicant is hereby granted leave to institute proceedings against SMM
Holdings (Private) Limited in respect of a claim for the sum of US$ 3 635
158-31 (three million six hundred and thirty five thousand one hundred and
fifty eight United States dollars and thirty one) together with costs of suit
and interest as applicable thereon.
3.
The respondent shall pay the costs of this application
Kantor & Immerman,applicant's
legal practitioners
Dube,
Manikai & Hwacha,respondent's legal practitioners
