DISRIBUTABLE (90)

Judgment No SC. 124/04

Civil Appeal No. 185/04

(1) ZIMBABWE FINANCIAL HOLDINGS LIMITED

(2) ZIMBABWE BANKING CORPORATION LIMITED v

FINHOLD SERVICES (PRIVATE) LIMITED

SUPREME COURT OF ZIMBABWE

CHIDYAUSIKU CJ, SANDURA JA & GWAUNZA JA

HARARE, OCTOBER 28, 2004 & JANUARY 14, 2005

R M Fitches, for the appellants

E W W Morris, for the respondent

SANDURA JA: This is an appeal against a judgment of the High Court which set aside the purported cancellation of the sale of sixteen million shares in the second appellant to the respondent, and the purported cancellation of those shares.

The background facts in this matter may be tabulated conveniently as follows –

1. At the relevant time the second appellant (“Zimbank”) was a wholly owned subsidiary of the first appellant (“Finhold”). The respondent (“Finserve”) was initially incorporated by Finhold for Finhold’s workers and management. However, at the relevant time the board of directors of Finserve consisted of Finhold’s workers, after the resignation of the previous board, consisting of representatives of Finhold’s management.

2. Before December 1996 Finhold and its subsidiaries sold certain debts to Climax Investments (Private) Limited (“Climax”) for one billion dollars. Climax paid that sum by means of two loans, which were a loan of six hundred million dollars arranged by the Reserve Bank of Zimbabwe (“the RBZ”) from a third party, and a loan of four hundred million dollars from Finance Trust of Zimbabwe (Private) Limited (“Fintrust”), a wholly owned subsidiary of the RBZ. In respect of both loans, Finhold guaranteed the due performance by Climax of the terms of the loan agreements.

3. On 19 December 1996 a special resolution and an ordinary resolution were passed at an extraordinary general meeting of Zimbank’s shareholders, which was attended by Mr E N Mushayakarara (“Mushayakarara”), the Finhold group chief executive, and Mr S T Biyam (“Biyam”), Zimbank’s managing director. Finhold was represented by a proxy, Mr A L A Pichanick (“Pichanick”), Zimbank’s deputy chairman.

4. The special resolution increased the authorised share capital of Zimbank from twenty million shares to thirty-six million shares and, in relevant part, read as follows:

“that … the authorised share capital of the company be and (is) hereby increased from twenty million dollars … divided into twenty million … ordinary shares of one dollar … each to thirty-six million dollars … divided into twenty million … ordinary shares of one dollar … each and sixteen million … convertible preference shares of one dollar … each, by the creation of sixteen million … convertible preference shares of one dollar … each, entitling holders of each convertible preference share to a dividend of three comma five (3,5) times that of each ordinary share for a period of five (5) years commencing on the 1^st January, 1997, and terminating on the 31^st day of December, 2001, on which date the convertible preference shares shall revert to ordinary shares.”

5. The ordinary resolution authorised the board of directors of Zimbank to issue sixteen million convertible preference shares to Fintrust, which, as already stated, had advanced the loan of four hundred million dollars to Climax.

6. On 31 December 1996, following the passing of the ordinary and special resolutions already mentioned on 19 December 1996, a written agreement was concluded between Finhold and Zimbank on the one hand and the RBZ, Fintrust and Climax on the other hand (“the RBZ agreement”). Finhold and Zimbank were represented by Mushayakarara. The most important clauses of the agreement were clauses 2, 4, 6 and 8.

7. In terms of clause 2, as read with the preamble to the agreement, it was agreed that Finhold’s guarantee in respect of the two loans advanced to Climax would be cancelled and would be replaced by the creation by Zimbank of sixteen million convertible preference shares of one dollar each which would be issued to Fintrust.

8. Clause 4 provided as follows:

“Each new preference share will be vested with a dividend right of three comma five times the dividend declared on each ordinary share. These rights will apply until the payment of the final dividend for the 2001 financial year only. Thereafter, the shares will convert to ordinary shares of $1 each on the day after the last date to register for the 2001 final dividend (the conversion date).”

9. In terms of clause 6, Finhold was granted the option to purchase the preference shares at a price that would reimburse Fintrust the outstanding amount of its loan to Climax at any time prior to the conversion of the preference shares into ordinary shares. And clause 8 provided that if Finhold did not exercise its option by the conversion date, Fintrust could either request Finhold to exchange the shares in Finhold for Fintrust’s shares in Zimbank, or dispose of the ordinary shares arising from the conversion to a third party on terms decided by Fintrust.

10. Following the conclusion of the RBZ agreement the sixteen million convertible preference shares were duly created and issued to Fintrust.

11. On 23 January 1997 the RBZ agreement was tabled before the Finhold board of directors for ratification, and was duly ratified.

12. On 28 February 1997, the ordinary and special resolutions passed at the extraordinary general meeting of Zimbank shareholders on 19 December 1996 were tabled at the 8^th annual general meeting of Finhold shareholders for confirmation and were confirmed. Mushayakarara and Biyam attended that meeting.

13. Thereafter, Fintrust held the convertible preference shares in Zimbank until it resolved to sell them. Accordingly, on 2 October 2001 the RBZ wrote to Zimbank as follows:

“This serves to confirm Fintrust’s intention to dispose of its sixteen million preference shares in Zimbabwe Banking Corporation Limited, now converted to ordinary shares.

As per our telephone conversation, we would greatly appreciate your identification of a buyer on our behalf, whose identity and the price should be made known to us before any commitments are made.”

14. On 5 October 2001 Zimbank responded to the RBZ letter dated 2 October 2001, and indicated that Finserve was offering to purchase the shares for two hundred million dollars. That offer was accepted by the RBZ on 8 October 2001.

15. On 10 October 2001 Intermarket Discount House Limited granted a loan of two hundred million dollars to Finserve to enable it to purchase the shares, which it did on that date.

16. On 20 November 2001 an extraordinary general meeting of Zimbank’s shareholders, which was attended by Mushayakarara and Biyam, was held. Part of the minutes of that meeting reads as follows:

“He (the chairman of Zimbank) highlighted that in line with the (RBZ agreement), the Board (of Zimbank) was recommending that the (preference) shares be converted to ordinary shares of the nominal value of one dollar each and that they be exchanged for Finhold shares following their acquisition by Finserve from Fintrust on 10 October 2001.”

The minutes indicated that the following resolutions were then passed:

“a) That the sixteen million … convertible preference shares of the nominal value of one dollar each, issued and allotted to (Fintrust), be and they are hereby cancelled, and that in place thereof sixteen million … ordinary shares of the nominal value of one dollar each be issued; and

b) That the sixteen million … ordinary shares of the nominal value of one dollar each so issued be allotted to (Finserve) … .”

17. On 20 November 2001, following the allotment of the sixteen million ordinary shares to Finserve, a share certificate was issued to Finserve in respect of those shares. One of the signatures on that certificate was that of Mushayakarara.

18. A dispute concerning the shares subsequently arose between the parties to this appeal, and on 4 December 2002 a joint meeting of the Finhold and Finserve boards was held where it was alleged that the acquisition of the shares by Finserve had been fraudulent.

19. On 9 May 2003 Mushayakarara wrote to Finserve demanding the signing by all the directors of Finserve of a resolution transferring the sixteen million shares in Zimbank to Finhold. The demand was rejected.

20. On 12 May 2003 the Finhold and Zimbank boards purported to nullify the sale of the sixteen million Zimbank shares to Finserve, and to cancel the shares. As Finserve could not accept that, it instituted a court application in the High Court on 12 June 2003, seeking an order setting aside the purported nullification of the sale and the cancellation of the shares. The learned judge who heard the application granted the order sought.

Aggrieved by that decision, Finhold and Zimbank appealed to this Court.

At the hearing of this appeal the appellants applied for leave to adduce further evidence. The evidence sought to be adduced was in the form of an affidavit deposed to by Regis Taruvinga (“Taruvinga”), Finhold’s group company secretary and Zimbank’s company secretary. The allegation was that the affidavit would assist this Court in ascertaining the conversion date, which had been assumed by all the parties in the court a quo to be common cause and to be a date in October 2001.

The application was opposed and, after hearing the parties, we reserved our decision on the matter.

In Leopard Rock Hotel Co (Pvt) Ltd and Anor v Walenn Construction (Pvt) Ltd 1994 (1) ZLR 255 (S), at 260 C-H, this Court set out the principles which would guide it in determining whether an application for leave to adduce further evidence on appeal should be granted.

The first principle is that it must be shown that the evidence tendered could not have been obtained with reasonable diligence for use at the trial. The second is that the evidence must be such as is presumably to be believed or apparently credible. The third is that the evidence must be such that its effect would be determinative of the issue. And the fourth is that the conditions since the hearing must not have so changed that the fresh evidence would prejudice the opposite party.

In the application before us, no attempt was made to justify the leading of fresh evidence on the basis of the above principles. In fact, there can be no doubt that the said principles have not been satisfied. The application is, therefore, dismissed with costs.

I now wish to deal with the appeal. The real issue in the appeal is whether the boards of Finhold and Zimbank had any legal basis for nullifying the sale and transfer of the shares from Fintrust to Finserve in October 2001, or for the cancellation of the shares in question. In my view, the answer to that question is in the negative.

In the first place, as far as the cancellation of the shares was concerned, the learned judge in the court a quo found that the cancellation constituted a reduction of Zimbank’s share capital, and that as it did not comply with the provisions of s 92(1) of the Companies Act [Chapter 24:03] (“the Act”) the cancellation was of no force and effect.

Section 92(1) of the Act, in relevant part, reads as follows:

“Subject to confirmation by the court, a company may, if authorised by its articles, by special resolution reduce its share capital in any way … and may, if and so far as is necessary, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.”

No evidence was placed before the learned judge to show that the provisions of this section had been complied with. The conclusion reached by the learned judge was, therefore, correct.

Secondly, the submission by counsel for the appellants in his heads of argument that the creation of the shares by Zimbank was irregular, does not, with respect, have any merit. The creation of the shares was authorised by a special resolution passed at an extraordinary general meeting of Zimbank’s shareholders which was attended by Mushayakarara and Biyam.

Indeed, it was common cause in the court a quo that there was nothing irregular about the creation of the shares. As a result, the learned judge said the following at p 3 of the cyclostyled judgment, HH-103-2004:

“It is common cause that there was nothing irregular concerning the creation of the sixteen million shares. If anything, the creation and issuance of the shares was meticulously done, with the requisite resolutions passed at board and at shareholder level. Everything was done according to the book.”

In addition, the allegation that the creation of the shares was irregular was not supported by Mushayakarara who deposed to the opposing affidavit on behalf of Finhold and Zimbank. Mushayakarara’s complaint, as set out in the affidavit, was as follows:

“15. Prior to the exchange of correspondence in October 2001, the issue of the option exercisable in terms of clause 6 of the RBZ agreement had not been brought to the Finhold Board for its consideration.

16. Indeed the Finhold Board did not engage itself as to the economic consequences of the buy-back of the preference shares on shareholders at the various stages covered in clause 6 or 8(a) of the RBZ agreement.”

With respect, that is not a valid argument because neither Fintrust nor Finserve could be blamed for Finhold’s failure to exercise its option. The fault lies with Finhold itself.

Finhold was fully aware of the provisions of the RBZ agreement, having been represented in that agreement by Mushayakarara. As already indicated, the agreement was ratified by the Finhold board on 23 January 1997. In addition, on 28 February 1997, the ordinary and special resolutions passed at the extraordinary general meeting of Zimbank shareholders on 19 December 1996 were confirmed at the 8^th annual general meeting of Finhold shareholders.

Thirdly, counsel for the appellants made submissions in respect of the conversion date. In this regard, it is pertinent to note that the conversion date was common cause in the court a quo. The parties assumed that it was a date in October 2001. Thus, the deponent to the founding affidavit in the application for leave to adduce further evidence said:

“The issue of the conversion date had been assumed to be common cause by all the parties. It had been assumed that the conversion date was a date in October 2001 when the preference shares were purportedly converted to ordinary shares.”

However, it must be borne in mind that at an extraordinary general meeting of Zimbank held on 20 November 2001 a resolution converting the sixteen million preference shares to ordinary shares was passed. It follows, therefore, that by agreement of the shareholders at an extraordinary general meeting the conversion date became 20 November 2001.

In addition, it is pertinent to note that in terms of the special resolution passed at the extraordinary general meeting of Zimbank’s shareholders on 19 December 1996, the conversion date was 31 December 2001.

However, in my view, the conversion date is not of much significance. That is so because whether that date was 10 October 2001, when the shares were sold to Finserve, or 20 November 2001, when Zimbank resolved at an extraordinary general meeting to convert the preference shares to ordinary shares, or 31 December 2001, the date of conversion in terms of the special resolution passed on 19 December 1996, the fact is that Finhold was aware that it had the option to purchase the shares in terms of the RBZ agreement and chose not to exercise its rights.

Even as late as 20 November 2001, when an extraordinary general meeting of Zimbank shareholders was held, and the chairman of Zimbank indicated that the Zimbank board was recommending that the preference shares be converted to ordinary shares following their acquisition by Finserve from Fintrust on 10 October 2001, Mushayakarara, who attended that meeting, and who was very familiar with the terms of the RBZ agreement, raised no objection on behalf of Finhold. In fact, on that date he signed the share certificate which stated that Finserve was the proprietor of sixteen million ordinary fully paid shares.

There is, therefore, no legal basis for the nullification of the sale of the shares to Finserve or the cancellation of those shares.

In the circumstances, the following order is made –

1. The application by the appellants for leave to adduce further evidence is dismissed. The costs of that application shall be paid by the appellants jointly and severally, the one paying the other to be absolved.

2. The appeal is dismissed, with costs to be paid by the appellants jointly and severally, the one paying the other to be absolved.

CHIDYAUSIKU CJ: I agree.

GWAUNZA JA: I agree.

Dube, Manikai & Hwacha, appellants' legal practitioners

Costa & Madzonga, respondent's legal practitioners