[Opposed Application HH 512-16]

May 12 and August 31, 2016


Company law – Liquidation – Treatment of assets in liquidation – Insolvency Act [Chapter 6:04] – Section 97 – Position of creditor in possession of insolvent’s movable assets – Need for creditor to be “of an insolvent estate”.

The applicant was a company in liquidation. Before being placed under liquidation, it had borrowed money from the respondent and as security for the loan, it pledged its shares in a public company. When it failed to repay the loan, the respondent sold the shares to a third party. However, due to Stock Exchange requirements, the sale of shares to the third party had not yet been completed by the time the company was placed under liquidation. The liquidator demanded the shares claiming that they were assets of the company in liquidation.

Held, that the respondent was not a creditor of “an insolvent estate” within the contemplation of s 97 of the Insolvency Act [Chapter 6:04] because the shares had ceased to belong to the applicant company before its liquidation. The company lost its rights to the shares before its liquidation when it failed to repay the loan.

Cases cited:

Alexander and Another NNO v Standard Merchant Bank Ltd 1978 (4) SA 730 (W), referred to

Al Shams Global BVI Ltd v Chikura NO & Anor HH 361-16 (unreported), referred to

Bell PTA (Pvt) Ltd v Cab Park Investments (Pvt) Ltd t/a Macatoo Mining HH 430-16 (unreported), referred to

Mutasa v Telecel International & Anor HH 331-14 (unreported), referred to

Nu Aero (Pvt) Ltd v Karase & Anor HH 884-15 (unreported), referred to

PG Industries (Zimbabwe) Ltd v Jones Holdings (Pvt) Ltd 2015 (1)
ZLR 552 (H), referred to

Supa Plant Investments (Pvt) Ltd v Chidavaenzi 2009 (2) ZLR 132 (H), referred to

Wightman t/a JW Construction v Headfour (Pty) Ltd and Another 2008 (3) SA 371 (SCA), referred to

Zimasco (Pvt) Ltd v Marikano 2014 (1) ZLR 1 (S), referred to

Legislation considered:

Companies Act [Chapter 24:03], ss 210 (2), 212, 213, 213 (c), 276 (2)

Insovency Act [Chapter 6:04], ss 97, 97 (5), 113, 114

N Madya, for the applicant

L Uriri, for the respondent


This is an opposed application centred on the transfer of certain shares from the respondent to the applicant. On 9 January 2015, the applicant, Allied Bank Ltd (“Allied Bank”), petitioned the court for a provisional winding up order which was granted on 4 February 2015. The final liquidation order was granted by the court on 4 March 2015. The Deposit Protection Corporation was appointed as its liquidator and it in turn appointed Dr Cecil Madondo of Tudor Consultants to act on its behalf as the liquidation agent.

In their founding and supporting affidavits both the liquidator and his liquidation agent averred that in the liquidation process, the latter became aware that Allied Bank had entered into a transaction on 4 July 2014, whereby it had borrowed US$ 410 000 from the respondent, Ever Prosperous Worldwide Ltd (“Ever Prosperous”). The “loan” was repayable over a six month period with interest at the rate of 36 per cent per annum. Allied Bank had pledged its 37 233 118 NICOZ Diamond Insurance Ltd shares as security for the “loan”. A resolution regarding borrowing money from Ever Prosperous had been adopted by Allied Bank on 3 July 2014.

In brief, what is sought in this application on behalf of Allied Bank is the surrender of the share certificate to the liquidator of the 37 233 118 NICOZ Diamond Ltd shares on the basis that they belong to the company in liquidation. In the event that Ever Prosperous concluded a sale of the shares, it is sought that the sale be set aside and that Ever Prosperous be required to surrender the share certificate within five days of the granting of any order.

The basis of applicant’s claim

The context of this claim is as follows: When Allied Bank failed to repay the “loan”, Ever Prosperous took steps on 12 January 2015, through its Stock Brokers, (“ABS Stock Brokers”), to sell the shares pledged as security to a company known as Brainworks Capital (Pvt) Ltd. However, due to new Stock Exchange requirements effected in August 2014, the sale could not be completed, as the money now needed to be paid into the account of Allied Bank as the registered owner of the shares. Accordingly, an email had been written by ABC Stock Brokers on behalf of Ever Prosperous to the liquidation agent on 18 March 2015 requesting certain information to facilitate the transfer of the shares. This information included among other things, the court order confirming liquidation, copies of memorandum and articles, and importantly a letter showing the authorised recipient of the proceeds from the disposal of the shares. The liquidation agent had responded attaching some of the requested documentation, including authorising the sale amidst an indication that the proceeds were to be paid into the account of Allied Bank.

In demanding the shares as the property of Allied Bank, the liquidation agent relies on ss 212 and 213 of the Companies Act [Chapter 24:03] to argue that by law the money should be transferred to the liquidator and that Ever Prosperous, like all other creditors, should prove its claim. Section 212 states that the effect of a winding up order is that it operates in favour of all creditors and contributories as if the petition was presented by all of them jointly.
Section 213 (c) in particular provides that transfer of shares made after the commencement of winding up is void unless the court orders otherwise. It reads as follows:

“213 Action stayed and avoidance of certain attachments, executions and dispositions and alteration of status

In a winding up by the court—

(a) …

(b) …

(c) every disposition of the property, including rights of action, of the company and every transfer of shares or alteration in the status of its members, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.” (my emphasis)

It is thus the liquidation agent’s contention that the attempted sale on
12 January 2015 is improper as it came after the company had already lodged its petition for a provisional liquidation order on 9 January 2015. He avers that the company was therefore under liquidation at the time of attempted disposal. He also highlights that by virtue of s 210 (2) of the Companies Act, winding up of a company is deemed to have commenced at the time of presentation of the petition for winding up.

Given that Ever Prosperous, through its director Mr Jayesh Shah, avers that they are willing to sell the shares and deposit the money into Allied Bank’s account if there is confirmation of how much they are going to be paid and when, the liquidation agent argues that if the request were to be complied with, the proceeds of the sale would be taken by one creditor who would not have proved its claim and that this would constitute undue preference over other creditors. He insists that whether Ever Prosperous is a preferred creditor or unsecured creditor is a matter to be dealt with according to the law relating to insolvent estates as regulated by both the Insolvency Act [Chapter 6:04] and Companies Act.

Section 114 of the Insolvency Act is said to be very clear on how to deal with a secured creditor. He also says that Ever Prosperous cannot hold on to company assets just because it wants to know whether it will be treated as a secured creditor or not. The amount to be disbursed to it, it is said, will be dealt with in the distribution account in compliance with the law. Essentially, he maintains that Ever Prosperous should lodge its claim through the Master’s office and join other creditors.

Ever Prosperous is also said to be interfering with the liquidator’s discharge of his duties in terms of s 276 (2) of the Companies Act, which requires the liquidator to recover assets of the company, both movable and immovable. The Master having been approached by the liquidation agent in writing regarding the shares, agreed with the sentiment that the shares at this point need to be transferred to the liquidator.

The liquidation agent further asserts in his answering affidavit that contrary to the claim that the money was advanced as a loan, the deal note shows that it was in fact an investment, with a provision for it being rolled over at the termination of the investment period in the event of no instructions having been received on what to do with the money. After capturing the quantitative data relating to the transaction such as the amount advanced, the tenure of the agreement, the rate of interest and the maturity date, the wording at the bottom of the deal note which is relied on by the applicant, reads as follows:

“We thank you for entrusting us with your business.

For our mutual convenience, we suggest that you contact us on the day of maturity of this contract to advise your intentions regarding the proceeds. If we do not hear from you, we will automatically renew the investment for a further similar period at prevailing rate”. (my emphasis as I shall return to the implications of the wording of the deal note).

He argues that a rollover is in fact what occurred. He says the only proof of a loan is in the company resolution of 3 July 2014, where six of its directors passed a resolution authorising borrowing from Ever Prosperous, the transfer of the share certificate for the NICOZ Diamond shares as security, and, the signing of the share transfer forms. He asserts that the deal note amounts to a disguised investment. He argues that a loan agreement should have been attached. He also states that there is no written proof that Ever Prosperous terminated the investment after 31 December 2014, given that the deal note specifically indicated that it would be rolled over. He maintains that it was rolled over for another six months and that it was not yet due until June 2015.

Relying on the case of Alexander and Another NNO v Standard Merchant Bank Ltd 1978 (4) SA 730 (W) it is asserted that during the currency of a cession, there is no disposal because the cessionary cannot freely dispose of the property but is under an obligation to cede the rights back to the cedent upon payment of the debt.

The respondent’s resistance to the claim

There is, in effect, a tug of war for the shares as Ever Prosperous equally maintains that on the facts, the shares which had been used as security belong to it since Allied Bank failed to pay back the loan within the stipulated time. Mr Jayesh Shah as the director of Ever Prosperous, averred that the Bank paid interest on the “180 days” borrowing for only five months between August and December. Thereafter it failed to pay interest for the sixth month as well as to pay pack the principal sum of US$ 410 000.

His view is that the shares do not belong to Allied Bank as the transaction was captured by way of a board resolution issued by Allied Bank on 3 July 2014 with the deal note having been issued immediately thereafter on 4 July 2014, although he concedes that this did not mean the shares were disposed of. However, following default of payment on 31 December 2014 as per agreement, his firm standpoint is that the security became executable. In other words, there was a loan and pledge agreement. It is also his position that Allied Bank was clearly obliged to provide and execute all the necessary documents for the sale of the shares in the event of its failure to pay back the loan.

He also argues that the liquidator is bound by the terms of the agreement between the client and Allied Bank. He points out that the Bank already benefited from the agreement and that what remains is due performance of the obligations under the agreement by the liquidator on behalf of Allied Bank. He argues that the refusal to sanction the conclusion of the transaction is unreasonable conduct in the absence of a court order setting aside the board resolution. He maintains that Ever Prosperous is entitled to hold on to the shares and to sell the same. He also states that the impasse has been caused by the refusal of the liquidator to answer categorically the question of how much Ever Prosperous will receive if the shares are handed over to the liquidator.

The legal arguments

Mr Madya who appeared on behalf of Allied Bank (in liquidation) as applicant, argued that the deal note embodied the agreement between the parties and that it was the duty of the court to interpret that document. He contended that whether the document embodied a transaction as a loan or money bearing investment had no bearing on whether the respondent was entitled to refuse to hand over the shares as security as the issue could be decided by this Court, whether it looked at the transaction as a loan transaction or otherwise. He argued that the claim that the shares had been disposed to Brainwork’s Capital was patently false as the sale could not have been conducted without reference to the applicant.

He argued that s 97 of the Insolvency Act is clear on what a creditor who holds on to movable property as security is supposed to do. Essentially a creditor holding such property has a right to decide whether to dispose of the security, failing which it must be handed over to the trustee for realisation. He also pointed out that in terms of s 97 (5) even where a creditor elects to realise the security, proceeds must be paid over to the liquidator. He maintained that the respondent could not insist on holding onto shares or imposing conditions and should surrender the shares and the share certificate.

Furthermore, he contended that the respondent, Ever Prosperous, had already proved its claim in the estate of the Bank and as such its claim would be dealt with in the normal way using s 113 of the Insolvency Act which deals with the various costs to which securities are subject.

On the other hand, Mr Uriri, who argued on behalf of Ever Prosperous, highlighted that there were disputes of fact arising from the liquidation agent’s answering affidavit, which could not be resolved in application proceedings. He acknowledged the correctness of the observation by the Bank’s counsel that this point was being raised for the first time in the heads of argument. However, he argued that what his client had done in its opposing papers to the founding affidavit was to disclose a series of documents constituting the loan agreement. Ever Prosperous had also made the point that upon default, it had disposed of the shares to Brainworks.

He highlighted that in the answering affidavit, the liquidation agent on behalf of the applicant, had then shifted from his position in the founding affidavit and had placed into issue the disposal of the shares to Brainworks. Accordingly, Mr Uriri’s argument was that it was the applicant who had now created the dispute of fact at a time when the respondent could not reply to it. The dispute being on papers, his position was that it could be taken at this stage provided it did not occasion prejudice to the party. Furthermore, he contended that the dispute also raised a question of law and that it could be taken at this stage as it goes to the root of the matter. For these assertions reliance was placed on the cases of Mutasa v Telecel International & Anor HH 331-14 (unreported) and Zimasco v Marikano 2014 (1) ZLR 1 (S) at 2A-C. It was his standpoint that the characterisation of the agreement is critical because the law recognises parate executie, namely, the right of the creditor to resort to self-help if a debtor defaults on payment. In such event, the creditor can execute on the debtor’s property without a court order.

The question of whether there was a single document or whether it was a series of documents commencing with the resolution and incorporating the resolution, share transfer, and, delivery of the certificate, was a question which, in Mr Uriri’s view, could not be disposed of on the papers. He further asserted that only when these questions were answered could this Court decide whether the respondent could exercise parate executie.

He disputed Mr Madya’s view that the nature of the document is not important to the court. Furthermore, he argued that in terms of the provisions of the Companies Act and the Insolvency Act, the disposition must have taken place after the commencement of the liquidation proceedings. In essence, the gist of his argument was that once there was an agreement between Brainworks and the respondent, the sale had been perfected. His argument was that a sale is perfected the moment there is an agreement on the purchase price.

His legal assertion was that payment falls within the realm of performance and not validity of the agreement. He further argued that in the same manner, transfer is in the province of performance and does not detract from the validity of the contract. As such, to the extent that the applicant placed the sale in question, the issue of whether the applicable provisions of the various Acts come into play could not be decided until the factual disputes had been resolved.

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