Dominion Trading FZ-LLC v Victoria Foods (Private) Limited

### Preamble
1
HH324-13
HC7329/12
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DOMINION TRADING FZ-LLC

versus

VICTORIA FOODS (PVT) LIMITED

HIGH COURT OF ZIMBABWE

MATHONSI J

HARARE, 10 September 2013 & 2 October 2013

F Girach, for the applicant

A.Moyo with U. Sakhe, for the respondent

Opposed application

MATHONSI J: The applicant, an incorporation registered in the United Arab Emirates, has made an approach to this court, on court application, seeking a provisional liquidation order against the respondent, another incorporation cherishing its domicile in Zimbabwe, on the basis that it is unable to pay its debts and that it is just and equitable that the respondent be wound up.  The application is made in terms of s 207 of the Companies Act [Cap 24:03] (the Act).

At the commencement of the hearing, Mr Moyo for the respondent made two applications namely for the admission of 2 supplementary affidavits filed by the respondent and for the exclusion of a letter dated 26 June 2012 written by Kantor and Immerman, the respondent’s legal practitioners, to Dube Manikai and Hwacha the legal practitioners for the applicant marked “Strictly without prejudice”. Mr Moyo also sought the exclusion of annexures attached to the applicant’s answering affidavit running into 110 pages being a Pre-acquisition Due Diligence report dated 26 March 2012 prepared by Ernst and Young, but is referred to as the audited accounts of the respondent on the papers, and a Business Valuation report dated 16 March 2012 prepared by Banc ABC.

Both preliminary applications were opposed by Mr Girach who appeared for the applicant. In respect of the supplementary affidavits, Mr Moyo submitted that after the respondent had filed its opposing affidavit, the applicant had gone on to file an answering affidavit which is so lengthy that, taken together with its annexures, it runs into 231 pages in which it raised new issues not covered in the founding affidavit.  This then made it necessary for the respondent to file an additional affidavit to address those new issues.

Mr Moyo submitted that the second affidavit sets out the current state of affairs of the respondent and seeks to inform the court what has transpired between the parties since the application was filed.  In his opposition to the admission of the additional affidavits Mr Girach submitted that nothing should be read from the volume of the answering affidavit which makes only essential averments.  The applicant had to file a lengthy answer because the respondent started denying liability in its opposing affidavit when all the time it had acknowledged it and asked for time to pay.  In order to assert its case the applicant was constrained to place before the court all the relevant documentation establishing  liability.

Mr Girach maintained that the documents annexed to the answering affidavit speak to the respondent’s liability and its inability to pay.  Regarding the letter of Kantor and Immerman dated 26 June 2012, which was written on a ‘without prejudice’ basis and therefore privileged, Mr Girach conceded that it should not have been relied upon by the applicant on the ground of privilege.

Rule 235 of the High Court of Zimbabwe Rules, 1971 provides:

“After an answering affidavit has been filed, no further affidavits may be filed without the leave of the court or a judge.”

The respondent gave a good explanation as to why the two extra affidavits became necessary.  In a way Mr Girach’s point that the applicant had to place more evidence before the court than had been included in the founding affidavit, is the very basis why, in the interest of justice, the respondent should also be allowed to comment on that evidence. ANZ v Media and Information Commission 2006 (1) ZLR 128 (H) 131 E.

The gravaman of this matter is a determination of whether the respondent is insolvent and therefore should be wound up.  The application having been filed on 4 July 2012 but only set down for argument on 10 September 2013, the court will certainly benefit from an update of the current extent of liability as well as measures that have been put in place to improve the fortunes of the respondent.

For these reasons, I granted leave to the respondent to introduce additional affidavits which can only assist the court in determining the dispute between the parties.  I also expunged the letter of Kantor and Immerman dated 26 June 2012 on the ground of privilege.

Regarding the annexures to the answering affidavit Mr Moyo’s gripe with them was two fold namely that the authors of the reports made it clear that they were not to be used in this court and that they are misleadingly referred to in the answering affidavit as the audited accounts of the respondent when they are demonstrably not. In respect of the “Pre-acquisition Due Diligence Report” prepared by Ernst and Young dated 26 March 2012, the erstwhile auditors added an endorsement on the face of that draft report that “Reliance Restricted”.

Ernst and Young went on to qualify their report in the following:

“This draft report was prepared on the specific instructions of the directors of Holbud Limited (‘Holbud’) solely for the purpose of assisting them in connection with the proposed acquisition of an equity stake in Victoria Foods and should not be relied upon for any other purpose. For the reason that others may seek to use it for different purposes, this report should not be quoted, referred to or shown to any other parties unless so required by court order or regulatory authority, without our prior consent in writing.”

They went on to say:

“This report is based on a limited review of Victoria Foods and may not capture certain aspects that a full scale commercial due diligence investigation would reveal”

The valuation report of the respondent by Banc ABC contains similar qualifications which Mr Girach argued is standard procedure in the preparation of financial reports of that nature.

In my view, the objection to the production of the two reports made on behalf of the respondent cannot sustain an exclusion of the reports in question.   To my mind the qualifications I have alluded to above speak to their evidentiary value, what reliance can be placed on them in determining the dispute between the parties and whether they sit in a higher pedestal than the financial record relied upon by the respondent.  I am only prepared to go that far and look at them in that light and not to exclude them from the record as the applicant is entitled to rely on whatever evidence it has at its disposal in seeking to persuade the court to grant the relief that it seeks.

The applicant, which is in the business of selling bulk grain commodities to wholesale customers, entered into written Commodity Supply Agreements with the respondent, which is into the business of purchasing such commodities for resale to the local retail market.  In pursuance there of, the applicant supplied wheat, maize and rice to the respondent and invoiced the respondent for payment which was due within a period of 60 days from the date of invoice.  The total invoiced by the applicant was a sum of US $6 542 048-60.

It would appear that the responded made certain payments towards the debt and was credited for such payment as well as for some wheat which was damaged by rain and weight variance thereby reducing the claim of the applicant to US$5 685 841-61.  On 29 February 2012 the parties signed a document with the title “Victoria Food Sign off” which sets out figures of what was allegedly delivered to the respondent, in terms of which they agreed that what was owed by the respondent to the applicant was a sum of US$ 6 542 048-60.

Subsequent to that a dispute arose as to the exact amount owing and despite the agreement signed on 29 February 2012, the respondent disputed the figures presented by the applicant, the quantities allegedly delivered and the values.  It turned out that some of the wheat allegedly delivered was still locked up in the applicant’s silos and had not in fact been delivered.

During the process of reconciliation conducted by the parties, the applicant agreed to reduce its claim from the original figure of US$6 542 048-60 to US$5 685 841-61.  However, the respondent still disputed that figure.  In terms of the agreements entered into between the parties between February 2010 and August 2011 the standard terms of the Grain and Feed Trade Association’s Rules 100 (GAFTA No 100) applied, meaning that all disputes between the parties were to be resolved by arbitration in the United Kingdom.

It is probably for that reason that the parties instead agreed to refer the dispute to arbitration but not in the United Kingdom.  It was referred to the Commercial Arbitration Centre in Harare and retired Justice Smith had the privilege of being appointed to arbitrate.  Presumably having grown extremely impatient with that process as the debt remained unpaid, the applicant made an about turn and launched this application in terms of s206 (f) and (g) of the Act, namely that the respondent is unable to pay its debts and that it is just and equitable that it be wound up.

The applicant insisted that when demand for payment was made the respondent failed to effect payment even as it acknowledged indebtedness and repeatedly undertook to pay.  Additionally, the applicant maintained that it has lost confidence in the manner in which the respondent company is run and as creditor, it would rather have it wound up, it being just and equitable to do so.

As  proof of the applicant’s inability to pay, the applicant made reference to various correspondence penned by CFI Holdings Limited the holding company of which the respondent is a subsidiary, between March 2011 and March 2012 wherein promises to pay were made but none was effected. I must mention however that throughout that correspondence, no specific figure was cited as the amount owing, although the respondent expressed a willingness to settle the debt.

The respondent has opposed the application stating that the debt is not yet due because there is a serious dispute as to the exact amount owing which dispute has been referred to arbitration.  The arbitration is still to be undertaken in order to settle the dispute and determine the amount due.  It made reference to areas of conflict, namely the allegedly undelivered wheat worth US$462 835,60 which is included in the claim, weight differences accounting for about US$46 438,08 and $167 500,00 defective delivery (rotten rice) worth $14 000,00 and errors in computation of interest which would reduce its liability by $73 192,21.  For these reasons, the respondent argued, the dispute should be resolved by arbitration in terms of the agreement of the parties.

The respondent also stated in the supplementary affidavit of Stephen Paradzai Kuipa which I have admitted, that it has secured an investor to inject capital in its business.  The liability to the applicant having been disclosed to the investor, the debt owed to the applicant will be paid from that investment.  Meanwhile, the respondent has paid to the applicant a total sum of $2 165 000,00 towards the reduction of the debt.

Mr Girach for the applicant submitted that the best evidence of solvency is the payment of debts and the respondent having failed to pay on demand, it is insolvent and should be wound up.  In his view, the disputation of the amount owing by the respondent is merely a ruse to buy time.  The respondent has not shown that the debt is not due, it has not produced a reconciliation showing what it regards as being due, a clear sign that the respondent wants to leave the issue hanging in order to buy time.

In terms of s205 of the Act

“A company shall be deemed to be unable to pay its debts-

if a creditor, by cession or otherwise, to whom the company is indebted in a sum exceeding one hundred United States dollars then due, has served on the company a demand requiring it to pay the sum so due by leaving the demand at its registered office and if the company has for three weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; or

if the execution or other process issued, on a judgement, decree or order of any competent court in favour of a creditor, against the company is returned by the Sheriff or Messenger with the endorsement that no assets could be found to satisfy the debt or that the assets were insufficient to do so; or

if it is proved to the satisfaction of the court that the company is unable to pay its debts and in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.”

In approaching this case, I am mindful of the fact that in an application for a provisional order for liquidation the applicant is only required to establish a prima facie case. I am also mindful of the fact that even where, reliance is placed on s206 (g) for seeking the relief sought by the applicant, the court has a very wide discretionary power to accede to the application or not.  Indeed even where it has been shown that the company is unable to pay its debts, the court still has a narrow discretion.

The point is made by GILLESPIE J in Croc Ostrich Breeders of Zimbabwe (Pvt) Limited v Best of Zimbabwe (Pvt) Limited 1999 (2) ZLR 410 (H) 414 E-G 415 A that:

“Even were I incorrect in such a finding I would still not countenance the winding up of the respondent.  Mr Girach for Best of Zimbabwe urged upon me the discretion inherent in the court to refuse to order liquidation notwithstanding the proven existence of grounds for liquidation.  Such discretion is deliberately provided for by the use of the permissive ‘may’ in the enactment providing the grounds of winding up by the court. Even without this the court would, in the proper case, have the discretion flowing from its inherent jurisdiction to prevent abuse of its process.  These two sources together provide a judicial discretion, based on all the relevant circumstances of any case, to withhold an order of winding up even if grounds have technically been established.  The discretion is regarded as a narrow one.  Narrow in the sense that a creditor is entitled to a winding up exdebito justitiae save in exceptional circumstances.  The essence of the discretion is a decision as to whether to withhold relief, objective grounds for the granting of which have been established.  The factors to be considered differ depending on the grounds advanced for the granting of which have been established.  The factors to be considered differ depending on the grounds advanced for winding up.  The discretion is a judicial value judgement to be made on all the relevant factors.”

In making a pronouncement on the ground for winding up set out in s206 (g) CHATIKOBO J stated in Sultan v Fryfern Enterprises (Pvt) Limited  & Anor 2000 (1) ZLR 188 (H) 192 A-B:

“Section 206 (g) of the Act has been said to postulate not facts, but only a broad conclusion of law, justice and equity as a ground for winding up.

‘In its terms and effect (the section) confers upon the court a very wide discretionary power the only limitation originally being that it had to be exercised judicially with due regard to the justice and equity of the competing interests of all concerned.’

Per TROLLIP J in Moosa N.O v Mavjee Bhawan (Pvt) Limited & Anor 1967 (3) SA 131 (T) at 136 H.”

I have been called upon to decide whether the respondent is unable to pay its debts and whether it is just and equitable to order liquidation of the respondent in the circumstances of this matter.  The facts show clearly that the respondent owes the applicant substantial sums of money, the exact figure of which remains in dispute.  Although the respondent admits to owing some of the money, it has not admitted a specific amount.  The respondent has continued to pay to the applicant and has, since the dispute started, paid a total sum of $2 165 000, 00.  But for the dispute on the figure, it should have been paid within 60 days of the date of invoicing.

The question of the exact amount owing has been referred to arbitration, a process which the applicant does not appear keen to follow, it having elected instead, to go for the winding up of the respondent.

When setting out the grounds for winding up by the court the learned author RH Christie, Business Law in Zimbabwe, 2nd ed, Juta & Company Limited, stated at p427 of the inability to pay debts:

“The cases make clear that it will not avail the company to show that its assets exceed its liabilities if it is in a state of commercial insolvency, i.e. that it cannot meet its liabilities without liquidating its assets, the liquidation of assets for this purpose being one of the objects of winding up.  But if the company can show that it has a bona fide and reasonable defence to the petitioning creditor’s claim the creditor cannot succeed Mazongororo Paper Converters (Pvt) Limited v Mazongororo Sales (Pvt) Limited 1987 (1) ZLR 81(S)) nor can he succeed if by his own actions he is causing the company’s inability to pay its debts: Goodhope Enterprises (Pvt) Limited v Caps Holdings Limited 1991 (1) ZLR 9 (S).”

Indeed, where prima facie it appears that the respondent is indebted to an applicant in an application for liquidation, the onus is on the respondent to show that such indebtedness is disputed on bona fide and reasonable grounds: Stamboli &Anor v Nyamutambo Transport (Pvt) Limited 1985 (2) ZLR 320 (H); Badernhost v Northern Construction Enterprises (Pty) Limited 1956 (2) SA346.

In casu it is clear that the respondent is indebted to the applicant and that it has not paid the debt on demand.  Prima facie the applicant would be entitled to an order of winding up.  However the respondent has shown that the amount being claimed by the applicant is disputed and that such dispute is awaiting arbitration.  The respondent has pointed to discrepancies in the applicant’s figures and indeed the applicant has also made some small concessions, reducing the amount claimed in the process.

In my view the respondent has discharged the onus resting upon it to show that the indebtedness is disputed on bona fide and reasonable grounds.  It would be unsafe to allow the liquidation of the respondent, regard being had to its far reaching consequences, only for the liability to be successfully contested.  I would therefore not countenance the winding up of the respondent in the circumstances.

Even if I am wrong in that conclusion, this is a matter in which I would, in the exercise of my narrow discretion, withhold the order of winding up because of a number of reasons.  In the first instance, the parties agreed to refer the dispute to arbitration and that arbitration process is yet to commence.  Surely referral of the matter to arbitration was upon a realisation that there was a bona fide dispute involving figures.

In the second instance, without a fair determination of the dispute, the applicant stopped midstream and then pursued this application for a winding up.  In so doing it is seeking to deprive the respondent an opportunity, provided by the agreement between the parties, to have the dispute determined by arbitration.  Indeed the applicant would like the consequences of winding up to set in without it having proved its claim, without subjecting the claim to the test of arbitration.

More importantly, the respondent has been shown to have assets of substantial value.  While the existence of assets will not necessarily disentitle the creditor to a winding up order, it is a factor that I cannot overlook especially in the circumstances of this case where the respondent has shown that not only has it been paying the debt, it having paid in excess of $2 million, but also that it is in the genuine process of recapitalisation.

It occurs to me that the insistence of the applicant on a winding up, against this background is indicative of an abuse of process, the employment of the judicial process for a purpose other than that for which it was intended.

To my mind, the applicant is aware that arbitration which was agreed by the parties would not yield positive results and has therefore elected to employ the procedure for winding up in order to enforce payment of a disputed debt.  This is unacceptable as it amounts to harassment or oppression of the respondent; Millward v Glaser 1950 (3) SA 547(W) at 551.

In the result, the application is hereby dismissed with costs.

Dube, Manikai & Hwacha, applicant’s legal practitioners

Kantor & Immerman, respondents’ legal practitioners