Allied Bank Limited (In Liquidation) v Everprosperous Worldwide Limited

### Preamble
Judgement No. 46/19 |1
Civil Appeal No. SC 942/17
REPORTABLE (42)
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REPORTABLE		(42)

ALLIED     BANK     LIMITED     (IN     LIQUIDATION)

v

EVERPROSPEROUS     WORLDWIDE     LIMITED

SUPREME COURT OF ZIMBABWE

GWAUNZA DCJ, GUVAVA JA & MAKONI JA

HARARE, JUNE 12, 2018 & MAY 30, 2019

E T Matinenga, for the appellant

L Uriri, for the respondent

GUVAVA JA: This is an appeal against the whole judgment of the High Court dated 31 August 2016 dismissing an application wherein the following relief was sought:

“1.The respondent be and is hereby ordered and directed to surrender to the applicant within five (5) days of the granting of this Order the Share Certificates in respect of the 37 233 118 NICOZ Diamond Insurance Limited shares held by Certificate number 37315 by the Applicant.

In the event that the respondent concluded the sale of the shares to any third party, the sale transaction relating thereto be and is hereby set aside and the Respondent is directed to deliver the Share Certificate Number 37 315 in respect of 37 233 118 NICOZ Diamond Insurance Limited shares to the Applicant within five (5) days of the granting of this order.

The respondent pays the costs of this application.”

BACKGROUND FACTS

The facts of this matter are mainly common cause. They are set out hereunder:

The appellant is Allied Bank Limited, a bank in liquidation. The respondent is a company registered in accordance with the laws of Zimbabwe. On 4 July 2014 the respondent advanced a loan to the appellant in the sum of US$410 000. The loan attracted interest at the rate of 36 per cent monthly and would mature on 31 December 2014. The appellant pledged, as security for the loan, 37 233 118 NICOZ Diamond Insurance Limited shares, “the shares”. The shares were delivered to the respondent in negotiable form as evidenced by the Advice of Security Movement document and the security transfer form. On 31 December 2014, when the loan matured, it emerged that, the appellant owed the respondent in the principal sum as well as the interest for one month.

On 9 January 2015, an application was made for the winding up of the appellant. In a bid to recover the amount owed and the interest thereon, the respondent concluded a sale of the shares it held as security with Brainworks Capital Limited on or around 12 January 2015. The appellant had full knowledge of that transaction. The shares were however not transferred to Brainworks Capital Limited because ABC Stock Brokers, who were mandated to complete all transfer formalities, advised the respondent that the transfer requirements set by the Zimbabwe Stock Exchange (the ZSE) had been changed sometime in August 2014. ABC Stock Brokers then wrote to the appellant requesting a list of documents required by the ZSE to enable the transfer of shares.

Meanwhile, the application for provisional liquidation was granted on 4 February 2015 and final liquidation was granted on 4 March 2015. The Deposit Protection Corporation was appointed as the liquidator of the appellant. In turn, it appointed Cecil Madondo as the liquidation agent in terms of the Deposit Protection Corporation Act [Chapter 24:29]. In attending to his duties as the liquidation agent, Cecil Madondo discovered that the appellant owned shares that were in the possession of the respondent. He wrote a letter to ABC Stockbrokers on 14 April 2015, advising them that the appellant was in liquidation and authorising them to dispose of the shares and to deposit the proceeds into the appellant’s account number.

The respondent’s legal practitioners responded to the letter of 14 April 2015 by a letter dated 21 May 2015. The letter informed the liquidation agent that the appellant had pledged the shares to the respondent as security for a loan in transferrable form, which loan had not been serviced within the agreed time frame. The letter further stated that a purchaser had been found for the shares and that a sale agreement had been reached but transfer had not been possible due to the new requirements of the ZSE which among other requirements prescribed that the proceeds of the sale of shares be paid into an account opened by the appellant with the ZSE. A request was made for confirmation that should the shares be sold and the funds deposited into the appellant`s account, the proceeds would be transmitted to the respondent. The respondent also requested for a confirmation of when it would expect to receive the proceeds of the sale.

On 30 June 2015, the liquidation agent then wrote a letter to the Master of the High Court (the Master) on the issue, requesting that the proceeds from the disposal of the shares be transferred to the appellant`s account and that the respondent be directed to join the concursus creditorium by lodging its claim against the appellant through the office of the Master. The Master responded with a letter dated 21 July 2015 agreeing that the shares be sold and the proceeds be paid to the appellant and that the respondent should be treated like the rest of the creditors.

The liquidation agent forwarded the letter from the Master to ABC Stockbrokers together with instructions to sell the shares.  ABC Stockbrokers wrote to the liquidation agent informing him that the shares were in the possession of one Shah, a director of the respondent. The respondent’s legal practitioners wrote a letter to the Master disagreeing with the letter dated 21 July 2015 and reaffirming the position that the respondent would remain in possession of the shares and would only release them to the purchaser once it had been confirmed that the respondent would receive proceeds of sale of the shares.

This prompted the appellant to file an application in the court a quo seeking an order compelling the respondent to surrender to the appellant the share certificate/s in its possession. The court a quo held that the shares ceased to be the appellant`s property when it failed to pay in December 2014 before it went into liquidation and all that remained was to legitimately transfer the shares to the respondent. The court further held that it was clear that the process of transferring the shares must be done through the respondent and that the respondent`s request for a confirmation that the proceeds from the sale of shares be transmitted to its account was reasonable. Accordingly, the court a quo found in favour of the respondent and dismissed the application.

Aggrieved by the decision of the court a quo an appeal to this Court was made on the following grounds:

“The learned judge in the court a quo erred in holding that the Appellant lost its rights to the shares ‘in December 2014’ upon its mere failure to repay the amount due to the Respondent in the absence of evidence that the Respondent validly disposed of the shares or transferred the shares to itself in the exercise of its rights under the pledge.

Having accepted that there was a technical procedure that affected the ability of the Respondent to dispose of the shares when the need to sell arose and it being accepted that the shares had in fact not been sold, the court a quo erred in holding that the shares which had not been sold no longer formed part of the estate of the Appellant as at the date that the petition for liquidation was filed with the High Court of Zimbabwe.

The court a quo erred and misdirected itself in holding, as it must be taken to have done, that the automatic roll-over provision in the deal note did not apply when no evidence was placed before the court that the Respondent had complied with the terms of the deal note so as to prevent the roll-over.

The court a quo erred and misdirected itself in coming to the conclusion, as it must be taken to have done, that the change in the rules of the Zimbabwe Stock Exchange on the sale of the listed shares did not have the effect of removing the ability of the Respondent to negotiate the shares without reference to the Appellant.

The court a quo erred and misdirected itself in equating the accruing of a right to dispose of the shares with the loss of dominium in the shares in the absence of evidence that the shares were in fact validly disposed of.

The court a quo erred in holding that section 97 of the Insolvency Act had no application to the shares held by the Respondent as security for what it was owed by the bank.

The court a quo erred in holding that the disposal of the shares after the Appellant was placed under liquidation would not constitute disposal of property as contemplated in section 213 of the Companies Act.”

APPLICATION TO AMEND GROUNDS OF APPEAL

At the hearing of the appeal, Mr Matinenga, for the appellant, made an application for the amendment of grounds of appeal to add the following grounds:

The learned judge in the court a quo ought to have found that the agreement between the Bank and the Respondent amounted to a pactum commissorium and accordingly the agreement was illegal and contrary to public policy and ought therefore not to have been capable of enforcement.

In the circumstances the learned judge in the court a quo erred in finding that appellant was not entitled to a return of the shares forming the subject matter of the dispute.

In motivating the application, Mr Matinenga argued that although the words pactum commissorium were not used in the court a quo, a conclusion of law that can be drawn from the facts of the case is that the issue was argued in the court a quo albeit in different terminology.

Mr Uriri, for the respondent, vehemently opposed the application for amendment of the grounds of appeal. He argued that the issue of pactum commissorium was neither pleaded nor argued in the court a quo and that it was being raised for the first time on appeal. Mr Uriri further argued that the issue before the court a quo was whether the appellant was entitled to the shares and whether the respondent should join the line of creditors and not the legality of the loan agreement that was between the parties.

To that extent, Mr Uriri contended that the court a quo did not make any determination on the issue of pactum commissorium because the issue was not before it hence this Court being a court of record could not determine the issue. Mr Uriri also argued that his client would be prejudiced if the application is allowed.

The application for amendment of grounds of appeal was dismissed and it was indicated that the reasons for the dismissal will be included in the main judgment. These are they:

I agree with Mr Uriri that the issue of pactum commissorium was neither pleaded nor argued in the court a quo and that it is a point being raised for the first time on appeal. While it is trite that a question of law may be advanced for the first time on appeal, this is however only permissible if the point is covered by the pleadings in the court a quo and if its consideration will involve no unfairness to the party against whom it is directed. (See TN Harlequin Luxaire Limited & Anor v Quest Motors Manufacturing Private Limited SC 30/18, Austerlands (Pvt) Limited v Trade and Investment Bank Ltd and Others 2006 (1) ZLR 372 (H), Cole v Government of the Union of SA 1910 AD 263, Ngani v Mbanje and Another 1988 (2) SA 649 (ZSC); and Alexkor Ltd v the Richtersveld Community 2004(5) SA 460 (CC).)

In TN Luxaire Harlequin (supra) MAKARAU JA had the following to say:

“Thus, if the point of law raised is not fatal to any of the contentions of the respondent, or is incorrect in other respects, it has no adverse effect on the judgment appealed against which remains the correct position at law. It therefore serves no useful purpose but to vex and cause unfairness to the respondent.”

Clearly the criteria set for an application of this nature to be successful were not met. The point of law was not pleaded in the court a quo neither was it canvassed at the hearing. The issue of pactum commissorium itself is unmeritorious because the legality of the loan agreement is not in question.  A consideration of the merits of this issue at this stage would involve unfairness to the respondent. Accordingly it was for the above reasons that the application for amendment of grounds of appeal was dismissed.

Turning now to the merits of the appeal, a single issue for determination arises from the several grounds raised by the appellant. This appeal revolves around the question whether or not the shares formed part of the appellant’s property at the commencement of the liquidation process. In my view a determination of this issue will determine the appeal.

WHETHER OR NOT THE SHARES FORMED PART OF APPELLANTS PROPERTY

At the centre of this dispute is a letter dated 21 July 2015, whose contents were undisputed in the court a quo and which letter summarises the loan agreement that was entered between the appellant and the respondent before liquidation. I intend to reproduce the following paragraphs of the letter as they are of great importance:

“Everprosperous Worldwide Limited advanced a loan to Allied Bank on 04 July 2014.

The loan was secured on 37 233 118 Nicoz Diamond Insurance Ltd shares pledged to Everproperous Worldwide Ltd by Allied Bank.

The pledged shares were delivered to Everproperous Worldwide in a transferrable form, transfer being suspended until such a time as Allied Bank would have defaulted on the principle sum and interest thereon.

The maturity date for the loan and interest was 31 December 2014, and Allied Bank failed to repay the loan and interest thereon.

After 31 December 2014, Everproperous Worldwide contracted to sell the pledged shares on the ZSE. However, the pledged shares were not delivered to the prospective buyer. (There were ZSE formalities that needed to be complied with). Transfer of the pledged shares was thus not affected.

On 09 January 2015, a petition for the winding up of Allied Bank was presented at the High Court, and an order therefore was made on 04 February 2015 placing Allied Bank under provisional liquidation.” (my emphasis)

The crux of Mr Matinenga`s argument was that as at 9 January 2015 the pledged shares were owned by the appellant and the respondent only had possession. He argued that the respondent had the right to sell the shares but however the agreement of sale of shares was concluded after the commencement of the liquidation process hence it ought to be governed by s 213 of the Companies Act [Chapter 24:03].

On the contrary Mr Uriri contended that upon the appellant`s default in payment of the loan, the right of parate executie came to fore and that right could not be circumscribed by the commencement of the liquidation process.

A pledge arises by a contract in terms of which one person (the pledgor) places movable property in the hands of another (the pledgee) as security for his debt.  A pledge as security is accompanied by possession of the movable property by the pledgee. The reason for such possession is to avoid other creditors from being misled into granting the pledgor credit on the strength of the availability of assets already pledged. In addition, the possession gives the pledgee a real right in the movable pledged which he can enforce against all other creditors. If the pledger fails to pay the principal debt and interest as promised, as in casu, the pledgee is entitled to realize the property. The legal consequences of a pledge of shares as security for due performance of obligations by the holder of such shares, was described by H S Cilliers et al, Corporate Law, 3 ed (2000) at 292 para 18.23, in the following terms:

“If cession of shares as with a pledge of shares is intended, the analogy of the law of pledge is to the effect that the pledgor remains owner of the shares while the pledgee has to keep the share certificate and a signed blank transfer form in his possession to protect his real right in the rights of action deriving from the shares serving as security. If the pledgor defaults, the pledgee has to obtain a court order before he can realize his security unless informal execution (parate executie) has been agreed to by the pledgor.”

It is clear from the above that the respondent had the right to proceed to realize the shares in a bid to recover the amount due to it by obtaining a court order.

Indeed, the respondent with full knowledge and consent of the appellant secured a purchaser. The agreement of sale was concluded on or about 12 January 2015, after the commencement of liquidation. In my view it is this fact that changes the whole discourse.

The application for the winding up of the appellant was filed on 9 January 2015 and this is when the liquidation process is deemed to have commenced. In terms of s 210 (2) of the Companies Act [Chapter 24:03], the winding up of a company commences at the time when the petition for winding up is filed with the court. It provides:

“210 Commencement of winding up by court

Where, before the presentation of a petition for the

winding up of a company by the court, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution.

In any other case, the winding up of a company by the

court shall be deemed to commence at the time of the presentation of the petition for the winding up.

Where the court adjourns the hearing of an application

for the winding up of a company by the court, the applicant shall, unless the court orders to the contrary, advertise the application and the adjournment in the Gazette.” (my emphasis)

The date of commencement of the liquidation is particularly pertinent to this case if regard is also had to the provisions of s 213 (c) of the Companies Act. Section 213 (c) reads thus:

“213 Action stayed and avoidance of certain attachments, executions and dispositions and alteration of status
In a winding up by the court—
(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.”

Section 210 (2) as read with s 213 (c) of the Companies Act prohibits the disposition of the property of the company after the commencement of the winding up of the company. In terms of s 210 (2) of the Companies Act, the winding up commenced on the 9 January 2015. The agreement of sale of shares was concluded on or about the 12 January 2015. The agreement of sale of the shares is automatically void because there is no court order authorising it. In Afrasia Bank Limited v K. S. Trust & Anor SC 39/18, the court in explaining the import of s 213 (c) of the Companies Act had the following to say:

“It appears from the record that the contract of sale was made, and transfer tendered, one month before the winding up order which was made on 18 March 2015.  Thus, according to the evidence filed of record, the disposition was done one month before the winding up of the company commenced and is accordingly not caught by s 213(c). However, even if that were not the case, a reading of s 213 (c) shows that even where a disposition of the company’s property occurs after its winding up has commenced, the disposition is at most voidable as the court has the power to sanction the disposition and thus prevent a nullity occurring.” (my emphasis)

The respondent had the right to sell the pledged shares upon the appellant`s default in making payment by way of a court order or by parate executie. However, once the liquidation process commenced, that right had to be exercised within the parameters set on how a company that is in liquidation disposes of its property. After the commencement of the liquidation process, the shares could only be disposed of through the liquidator. The respondent had the right to realize the pledged shares in its possession however, it failed to exercise the right before the commencement of the liquidation process.  The fact that the appellant was aware of the sale does not in my view change the legal position.

Thus ownership of the shares remained with the appellant at the commencement of the liquidation process. The shares were therefore part of the estate of the appellant. In this regard, the court a quo erred in dismissing the application.

DISPOSITION

The appellant by pledging its shares lost possession of such shares. When it defaulted in making payment by the maturation date of the loan, in addition to possession, the respondent gained a further right to realize its security by way of a court order or by a parate executie. The respondent concluded the agreement of sale of shares after the commencement of the liquidation process. At law, such a sale which amounted to a disposition of the property of a company in liquidation is void unless the court orders otherwise. In the absence of the court ordering otherwise, the liquidation agent is entitled to deal with the shares as part of the estate of the appellant.

In my view the appeal has merit. There being no reason to depart from the general rule that costs follow the result, the general rule shall prevail.

Accordingly it is ordered as follows:

The appeal succeeds with costs.

The judgment of the court a quo be and is hereby set

aside and substituted with the following:

“The application be and is hereby granted.

The Respondent be and is hereby ordered and directed to surrender to

the Applicant within ten (10) days of the granting of this Order the Share Certificates in respect of the 37 233 118 NICOZ Diamond Insurance Limited shares held by Certificate number 37315 by the Applicant.

In the event that the Respondent concluded the sale of the shares to any

third party, the sale transaction relating thereto be and is hereby set aside

and the Respondent is directed to deliver the Share Certificate Number 37 315 in respect of 37 233 118 NICOZ Diamond Insurance Limited shares to the Applicant within five (5) days of the granting of this order.

The respondent pays the costs of this application.”

GWAUNZA DCJ  	:	I agree

MAKONI JA 		:	I agree

Wintertons, appellant`s legal practitioners

Dube, Manikai & Hwacha, respondent`s legal practitioners