REPORTABLE ZLR (25)

Judgment No. SC. 35/05

Civil Appeal No. 42/05

(1) JEFFREY MZWIMBI (2) DURAJADI SIMBA

(3) ROYAL BANK ZIMBABWE LIMITED v

(1) RESERVE BANK OF ZIMBABWE

(2) ZIMBABWE ALLIED BANKING GROUP

(3) ROBERT McINDOE, THE CURATOR OF ROYAL BANK ZIMBABWE LIMITED

SUPREME COURT OF ZIMBABWE

SANDURA JA, MALABA JA & GWAUNZA JA

HARARE, MARCH 7 & SEPTEMBER 5, 2005

S Moyo, for the appellants

E K Mushore, for the first and third respondents

E I Manikai, for the second respondent

SANDURA JA: This is an appeal against a judgment of the High Court which dismissed with costs the appellants’ application for an interdict and other relief.

The background facts are as follows. The first appellant (“Mzwimbi”) is the chief executive officer of the third appellant (“Royal Bank”) and the second appellant (“Simba”) is an executive director of Royal Bank. Mzwimbi and Simba hold forty-five percent of the shares in Royal Bank.

On 4 August 2004 the first respondent (“the RBZ”), acting in terms of s 53(1) of the Banking Act [Chapter 24:20] (“the Banking Act”), issued a written direction to Royal Bank, placing it under the management of the third respondent (“the curator”) for a period of six months. That period was subsequently extended.

Section 53(1) of the Banking Act reads as follows:

“Where –

(a) the Reserve Bank considers that a banking institution is in an unsound financial condition and is not operating in accordance with sound administrative and accounting practices and procedures, adhering to proper risk-management policies; or

(b) a banking institution has failed to comply with the minimum financial requirements prescribed in terms of this Act, and the Reserve Bank considers that it is unlikely to comply with them unless it is placed in curatorship;

the Reserve Bank may issue a written direction to the institution placing the institution under the management of a curator for such period, whether definite or indefinite, as in the Reserve Bank’s opinion will permit the institution’s condition to be remedied or resolved.”

After his appointment, the curator examined the affairs and transactions of Royal Bank before it was placed under curatorship, and on 23 September 2004 submitted a report to the RBZ. In that report he alleged, inter alia, that Mzwimbi and Simba had violated certain provisions of the Companies Act [Chapter 24:03] (“the Companies Act”).

Thereafter, on 28 October 2004, the RBZ issued its “Monetary Policy Statement: 2004 Third Quarter Review” (“the monetary policy statement”), in which it announced the implementation of a “Troubled Bank Resolution Policy”. The relevant paragraphs of the monetary policy statement read as follows:

“3.29 With effect from January 2005, the Reserve Bank will implement a comprehensive Troubled Bank Resolution (TBR) Policy, to decisively deal with the troubled banks who (sic) have failed to tread out of their difficulties.

3.30 The following are the salient features of this framework:

(a) All amounts owed to the Reserve Bank by the troubled banks will be converted into equity.

(b) A Special Purpose Vehicle (SPV) will be established to hold the equity in the troubled banking institutions, acquired through conversion of debt to equity.

(c) Existing shareholders will write down whatever is left of their shareholding, if any, in line with assessed levels of under capitalisation and bank losses deemed to be a result of misappropriation and/or mismanagement.

(d) To safeguard the Central Bank’s independence and neutrality in discharging its supervisory and surveillance roles, the SPV, called Allied Financial Services Ltd, will be a jointly owned entity between Government, creditors, and depositors who would have converted their deposits into equity. The SPV is, thus, not a Reserve Bank-owned entity.

(e) The troubled banking institutions will be amalgamated into one entity, under the name Zimbabwe Allied Banking Group (ZABG), initially to be managed by an appointed Management Board of turnaround and integration experts, supported by a competent Management Board of Directors.

(f) Post stabilisation, Government and its partners can offload the shares in ZABG to a wider base of owners, under indigenisation and empowerment programs that benefit a wider cross-section of the people of Zimbabwe than is the case at present.

(g) Banking institutions amalgamated into the ZABG will be taken as Special Business Units (SBUs), managed by the said experts at appropriate levels.

(h) The SBUs will have one main board in order to ensure efficient and effective co-ordination of strategy and alignment of operations.

3.31 In coming to this policy position, immense preparatory work has been done to ensure that there is a smooth transition and integration of the individual previously troubled banks into one entity.” (emphasis added)

Subsequently, in order to give legal effect to the troubled bank resolution policy, the Troubled Financial Institutions (Resolution) Act [Chapter 24:28] (“the Troubled Financial Institutions Act”) was promulgated on 14 January 2005. The Act provided for, inter alia, the administration of troubled financial institutions, and the formulation and implementation of schemes of resolution in respect of such institutions.

Thereafter, on 20 January 2005, the curator and the second respondent (“the ZABG”) concluded an agreement of sale, in terms of which the curator sold to the ZABG all the assets of Royal Bank. The appellants were not informed about the sale.

Six days later, on 26 January 2005, the legal practitioners acting for the appellants wrote to the respondents as follows:

“Our clients have been advised that public statements, advising the bank’s customers, creditors, shareholders and other interested persons have been made to the effect that the bank is part of an institution known as Zimbabwe Allied Banking Group, whereas the correct position is that the legal requirements for the amalgamation of banking institutions as provided for in the Troubled Financial Institutions (Resolution) Act and the Banking Act have not at all been pursued. Requisite notices to former directors, creditors and shareholders have not been issued in terms of the Troubled Financial Institutions Resolution Act. No confirmation application has been made to a judge of the High Court as is required in terms of that Act. No amalgamation application has been made in terms of the Banking Act. Consequently, the highly publicised amalgamation of Royal Bank with any other bank is manifestly unlawful.

We are advised that notwithstanding the fact that no lawful amalgamation has taken place in terms of the law, advertising signs of Royal Bank have been removed from its premises and have been replaced by advertising signs of Zimbabwe Allied Banking Group. There is no legal basis whatsoever for this action at this stage. Former directors, shareholders, creditors and other interested parties have received no communication whatsoever regarding what is taking place. You have displayed a brazen and contemptuous disregard of their interests and the law relating to amalgamation of banks.

In all the circumstances, we have been instructed to demand, as we hereby do, the legal basis on which the above have been done, failing which our clients shall be left with no option but to seek the urgent intervention of the High Court.”

When there was no substantive response to the above letter, the appellants filed an urgent chamber application in the High Court against the respondents on 31 January 2005, seeking a provisional order calling upon the respondents to show cause why a final order should not be made restraining them from, inter alia, using the premises, motor vehicles and other assets of Royal Bank, and setting aside any purported disposal or alienation of the business or assets of Royal Bank to the ZABG.

In due course, the opposing and answering affidavits were filed and the matter was heard on 7 February 2005. Since all the relevant papers had been filed, the matter was argued on the basis that what was being sought by the appellants was a final order. After hearing counsel’s submissions, the learned judge reserved his judgment. About two weeks later, the learned judge dismissed the application with costs. Aggrieved by that result, the appellants appealed to this Court.

Although several issues were argued in this appeal, I believe that the appeal may be disposed of on the basis of two of those issues. The first is whether the curator acted lawfully when he sold the assets of Royal Bank to the ZABG; and the second is whether the appellants had the right to file the urgent chamber application without the curator’s permission. I will deal with these issues in turn.

It was common cause that when the curator sold the assets of Royal Bank to the ZABG he did not act in terms of the Troubled Financial Institutions Act. It was also common cause that the transfer of Royal Bank’s assets to the ZABG was not in compliance with s 25(1) of the Banking Act which provides for the amalgamation of banking institutions.

However, it was argued on behalf of the respondents that in selling the assets the curator had acted in terms of subs (2) of s 55 of the Banking Act. That subsection, in relevant part, reads as follows:

“A curator shall have the following powers, to the extent that he is authorised to exercise them in terms of the direction under which he was appointed –

(a) - (g) …

(h) to dispose, by public auction, tender or individual negotiation, of any asset of the banking institution concerned, including –

(i) …; and

(ii) any asset for the disposal of which an approval contemplated in section 228 of the Companies Act [Chapter 24:03] would have been a prerequisite;

(i) …;

(j) generally, to take any action necessary for the administration or operation of the banking institution concerned, including the sale or closure of any branch, agency, or other office of the institution …”.

It was common cause that in terms of his letter of appointment the curator was authorised to exercise the powers set out in s 55 of the Banking Act.

In the circumstances, it was submitted on behalf of the respondents that as the curator had the power to sell any asset or branch of Royal Bank he could lawfully sell all the assets of Royal Bank. That submission cannot be accepted because the principal objective in placing a banking institution under the management of a curator is not to liquidate the institution but to enable it to become a successful concern. Accordingly, the curator’s power to sell any asset or branch of the banking institution concerned could only be exercised in order to achieve that objective.

In my view, placing a banking institution under the management of a curator is akin to placing a company under a judicial manager, the principal objective being to remove the causes of the financial difficulties experienced by the company so that the company can function normally.

In addition, the proviso to s 55(1)(g) of the Banking Act is significant. It states as follows:

“… if at any time he (the curator) is of the opinion that continued curatorship will not enable the banking institution to become a successful concern, he shall advise the Reserve Bank accordingly.”

That, in my view, is a clear indication that the principal objective of the curatorship is to enable the banking institution to become a successful concern. Such an objective cannot be achieved by selling all the assets of the banking institution.

It was further submitted that in terms of s 55(2)(h)(ii) of the Banking Act, which I have already set out in this judgment, the curator had the power to dispose of all the assets of Royal Bank. Section 55(2)(h)(ii) empowers the curator to sell:

“any asset for the disposal of which an approval contemplated in section 228 of the Companies Act [Chapter 24:03] would have been a prerequisite”.

The difficulty with this provision is that it refers to s 228 of the Companies Act, which does not at all deal with the disposal of assets, but with the obligation of the court, after making a winding-up order, to settle a list of contributories. Faced with that difficulty, counsel for the second respondent submitted that for s 228 this Court should substitute s 183(1)(b) of the Companies Act, which provides that the directors of a company are not empowered, without the approval of the company in general meeting, to dispose of all or the greater part of the assets of the company.

In my view, that is highly speculative because there is no basis for the conclusion that that is the section of the Companies Act which the legislature intended to refer to. In any event, there are other sections of the Companies Act in terms of which some type of approval is a prerequisite to the disposal of a company’s assets.

Accordingly, subs (2) of s 55 of the Banking Act does not authorise a curator to dispose of all the assets of a banking institution. It follows, therefore, that the curator acted unlawfully when he sold the assets of Royal Bank to the ZABG. In the circumstances, the sale and transfer of the assets were null and void, and of no force or effect.

I now wish to consider whether the appellants had the right or power to file the urgent chamber application without the curator’s permission. Before answering that question, I wish to state that there can be no doubt that the appellants had an interest or special reason entitling them to sue the respondents. The assets unlawfully sold and transferred to the ZABG belonged to Royal Bank, and the unlawful sale and transfer of the assets adversely affected the value of the shares held by Mzwimbi and Simba. The appellants, therefore, had the requisite locus standi in judicio.

However, having said that, I do not think that the appellants could exercise their power to sue the respondents without the curator’s permission. I say so because of the provisions of s 54(1) of the Banking Act. The section reads as follows:

“The issue of a direction in terms of section fifty-three shall have the effect of suspending the powers of every director, officer and shareholder of the banking institution concerned, except to the extent that the curator may permit them to exercise their powers.”

It was common cause that when the appellants filed the urgent chamber application in the High Court they had not sought the curator’s permission, and had not been permitted to file the application. In the circumstances, there can be no doubt that the application was not properly before the High Court and should not have been entertained.

However, there is another reason why the application was not properly before the High Court. It is found in s 55(4) of the Banking Act, which reads as follows:

“Any person who is aggrieved by any decision or action taken by a curator may appeal against it to the Reserve Bank.”

The appellants should have appealed to the RBZ against the curator’s decision to sell Royal Bank’s assets to the ZABG. The fact that the unlawful sale took place with the approval of the RBZ would not necessarily mean that the RBZ could not have objectively determined such an appeal. In any event, any adverse decision given by the RBZ in such an appeal could have been challenged by the appellants in the High Court.

It, therefore, follows that if the appellants had complied with the provisions of the Banking Act in challenging the curator’s actions, they would not have been without a remedy.

In the circumstances, whilst it is clear beyond doubt that Royal Bank’s assets were unlawfully sold and transferred to the ZABG, the appeal cannot succeed.

Finally, I wish to consider the issue of costs. In this regard, an important consideration is the fact that in disposing of the assets in question the respondents did not comply with the provisions of the Troubled Financial Institutions Act or the Banking Act, and therefore acted unlawfully. In the circumstances, it seems to me that this is an appropriate case in which this Court should mark its disapproval of the unlawful conduct of the respondents by making no order as to costs.

The appeal is, therefore, dismissed with no order as to costs.

MALABA JA: I agree.

GWAUNZA JA: I agree.

Scanlen & Holderness, appellants' legal practitioners

Atherstone & Cook, first respondent's legal practitioners

Dube, Manikai & Hwacha, second respondent's legal practitioners

Mawere & Sibanda, third respondent's legal practitioners