Zimbabwe 2008: Bridging the gaps – the ARL v AMG Case (By Mutumwa Mawere)
COMMENTARY – On 20 November 2008, AMG Global Nominees (Private) Limited (AMG) lost its appeal against an order made by Evans-Lombe J (the trial judge) on 7 April 2008 dismissing its application and declaring that ARL alone had title to the bearer share warrants subject to T & N’s security under the Memorandum of Deposit and Charge (MDC).
Since then, I have received numerous congratulatory messages about the victory that has largely been interpreted as a repudiation of President Mugabe’s policies.
However, the UK litigation was specifically looking at whether the transaction that AMG entered into with T & N as part of the reconstruction scheme designed solely to dismember SMM from ARL and ultimately I was legal. In particular, all the court was being asked is to make a determination on whether the power of sale that T & N purported to have had arisen.
Accordingly, the trial had nothing to do with the actions of the GOZ in Zimbabwe in so far as it had already seized the subject assets on the basis that SMM was state-indebted and insolvent notwithstanding the fact that no evidence existed supporting such a contention.
It is important to put the UK litigation in its proper context so that lessons can be appropriately drawn. Allegations have been made that the ARL acquisition was some part of the government’s indigenization drive and that, in fact, the acquisition was supported by the GOZ. Based on these allegations, I have often been referred to as a ZANU-PF crony. This case provided an opportunity for the GOZ to prove the case that it had a role in the acquisition.
It is therefore, important for people who have questions about how the acquisition deal was structured, financed, and its performance to read the judgment carefully.
The factual and legal matrix of the case clearly demonstrate that the GOZ did not provide any financial assistance to ARL rather such assistance was provided by SMM. Since the GOZ has of late enacted indigenization and empowerment legislation, it is important that the record be put straight that the acquisition of SMM was a result of white benevolence and not ZANU-PF patronage.
I, therefore, set out below the issues that came before the UK court in respect of the acquisitions and the strange position taken by AMG in its desperate bid to acquire the UK companies in order to perfect the expropriation in Zimbabwe. I am grateful that AMG did choose to use the UK courts to assert its rights because this litigation has exposed the bankruptcy and hypocrisy of the GOZ in terms of commitment to black economic empowerment.
In rejecting AMG’s contention that it was entitled to be registered in England as the owner of the shares in SMM Holdings Limited (SMMH) and THZ Holdings Limited (THZH) pursuant to a Sale of Shares Agreement (SSA) concluded on 5 November 2004 with T & N under which T & N purported to sell the shares in the two English companies to AMG.
Zimbabwe finds itself at the crossroads and facing a political stalemate whose resolution is urgent and critical. However, political posturing has often masked the extent of the political, legal and economic challenges that confront the country.
President Mugabe has consistently and persuasively argued that the West led by the United Kingdom government has engineered the crisis in Zimbabwe. He has sought to argue that the pursuit of a regime change agenda has been largely responsible for precipitating the economic crisis. He has rejected the contention that his government has been responsible for undermining the rule of law and property and human rights.
While he accepts that in so far as land reform, the government’s actions in dispossessing land owners are justified, he remains defiant that the actions of his administration have played any part in destroying the Zimbabwean promise.
He has positioned himself as the ultimate custodian of black economic rights by arguing that any regime change will be detrimental to black interests. He maintains that economic interests at the core of the Zimbabwean crisis in so far as the West is alleged to be seeking to maintain hegemony over economic resources.
He has sought to argue that as long as the victims of his policies are white, he sees no problems pursuing policies that are meant to transfer assets with minimal or no compensation to blacks. As a result, a law providing for the indigenization of the ownership of economic assets is now on the statute books.
Against this backdrop, it is important to unpack the political, commercial and legal significance of the ARL v AMG case.
At face value, this case is purely a commercial matter involving the interests and rights of two commercial entities.
However, the factual and legal matrix of the case provides clear evidence of the abuse of the state and the opaque manner in which the government is now conducting its business.
It also exposes the hypocrisy of the government on the indigenization issue. A brief factual background to the AMG claim is important for readers to better understand the real implications of the judgment.
The acquisition of SMM
This case provides useful facts for those interested in knowing about how SMM was acquired. As expected, the acquisition has often been misunderstood both in terms of its construction and performance. Unfounded allegations have been made that the acquisition was financed by way of a government guarantee.
The distortion of the facts has been exacerbated by the government that has sought to claim credit for the transaction as one example of its positive role in facilitating black economic empowerment.
In fact, Hon. Minister Patrick Chinamasa, in response to a question in Parliament stated as follows: “Mawere did not use any savings but he used government guarantees to purchase the company. He was hoping that if the company flourishes, he would be able to pay back what he would have borrowed. This did not happen.”
According to Chinamasa, the acquisition was only possible because of state support in form of a guarantee. To what extent does this statement an accurate reflection of the factual and legal position?
Factual Background of ARL’s deal structure and financing.
On 15 March 1996, my company, Africa Resources Limited (ARL), a company incorporated in the British Virgin Island (BVI), completed a transaction with T & N Plc, an English company, known as the Sale and Purchase Agreement (SPA). T & N agreed to sell its entire holdings in SMMH and THZH for US$60 million to be paid by 12 installments for US$5 million each out of the proceeds of export sales due to SMM Holdings (Private) Limited (SMM), a wholly owned subsidiary of SMMH, from the Minerals Marketing Corporation of Zimbabwe (MMCZ), the state minerals marketing and sales corporation.
THZH is the sole shareholder of Endurite Properties (Private) Limited (Endurite). SMM and Endurite were incorporated in Zimbabwe and held substantial value, either directly or through subsidiaries, in the case of SMM in asbestos mines and other industrial enterprises located in Zimbabwe and, in the case of Endurite in financial services.
The SPA was completed on 15 March 1996 when the members of SMM passed a special resolution authorizing SMM to provide financial assistance in connection with the purchase of the shares in parent company, SMMH, by ARL. In addition, an MDC was made between ARL and T & N whereby ARL deposited the bearer share warrants in SMMH and THZH to secure the obligations of ARL to T & N to procure the payments due to T & N. The MDC provided for a power to sell the security in the event of a default, namely a failure by ARL to pay or procure the payment of the purchase price.
Between 15 March 1996 and 7 October 1997, there was paid to T & N in aggregate sum of US$37 million with a balance remaining unpaid on 5 November 2004 when an agreement was made between AMG and T & N. The only power of sale referred in the AMG agreement is that conferred on administration by the Insolvency Act 1986.
Between 1996 and 2004, the ARL group of companies grew and diversified in Southern Africa.
At all material times I was one of the directors of SMMH and THZH. As directors of the two companies, we refused the request of AMG to be registered as the holder of the shares covered by the bearer warrants. In response, AMG issued a Part 8 claim on 24 January 2005, seeking order pursuant to Section 359 Companies Act 1985 for the rectification of the register of members of those companies.
In February 2005, ARL sought and in November 2005 obtained permission to intervene in the application initiated by AMG with a cross-claim under Part 20 and the burden of the claim was that it was the true owner of the shares and AMG was not entitled to the rectification, which it sought.
AMG’s pleading in so far as the financing of the SMM acquisition which seems to be at variance with Chinamasa’s contention is as follows: (a) the SPA was intended to be performed unlawfully in that it was intended that SMMH and THZH would give financial assistance for the purpose of ARL’s purchase of the SMMH bearer share warrants; (b) the purchase price of US$60 million payable under the SPA by ARL was to be funded by the payment to T & N exclusively from SMM’s export proceeds and not from the proceeds of state funding; (c) SMMH and not the government of Zimbabwe (GOZ) played a key role in procuring the payment by SMM of its export proceeds; and (d) ARL caused SMMH’s directors to direct SMM to pay export proceeds to T & N and it did so through my linked directorships in respect of ARL and SMMH.
AMG’s pleaded case is also that SMMH in procuring SMM to pay export proceeds, gave financial assistance in that: (i) ARL incurred a liability under the SPA to procure the payment of export proceeds; (ii) SMMH procured its subsidiary, SMM, to pay proceeds to T & N to reduce or discharge ARL’s liability; and (iii) SMMH gave financial assistance on the grounds that procuring SMM to pay export proceeds caused SMMH to suffer a material reduction in its net assets.
AMG, a nominee of the GOZ, made the case that the SPA was intended to be performed and was performed by the parties in contravention of UK laws and accordingly, the SPA was void and ARL never got good title to the bearer share warrants.
It is significant that the trial judge concluded that: (i) nothing done by SMMH or its board constituted financial assistance to ARL in paying the purchase price under the SPA; and (ii) financial assistance in the of the shares in SMMH was given by SMM and not by the GOZ as alleged by Chinamasa through the payment over of money which formed part of SMM’s assets and not part of the assets of SMM.
It is common cause that in late 2003, I became the subject of attention within Zimbabwe, and from the appointment of Gono as Governor of the RBZ, my companies were the target of extremely hostile Zimbabwean government initiated measures.
Some of the measures were economic principally instigated by Gono, some legal with Chinamasa/Manikai as the principal actor; some political with Mugabe as the principal actor is far as using the state of emergency; and some financial with Gono as the principal actor in unilaterally converting commercial loans granted to SMM in the ordinary course of business into state loans fully knowing that the state was not involved in any way in granting such loans to the company.
I was opportunistically classified as a fugitive from justice in Zimbabwe and attempts made by the GOZ to extradite me; were thrown out by the Courts in South Africa. The net effect of these hostile actions was to put very significant pressure on me through my companies as a prelude to the expropriation of all companies deemed to be under my control.
The Draconian Legislation
The pressure culminated in specific legislation being introduced into the Parliament of Zimbabwe. It was preceded by presidential decrees whose effect was to deny me any access to the courts while the GOZ had free reign on my assets.
Pursuant to the provisions of the presidential decree, an Administrator was appointed of the affairs of not only SMM but also all companies deemed to be under my control. Mr. Gwaradzimba was the Administrator of SMM by Chinamasa pursuant to the operation of the expropriation laws.
The effect of the reconstruction laws was to deprive ARL as the ultimate parent of SMM and related companies of any access to the assets of its Zimbabwean subsidiaries. The combined operation of the reconstruction laws and actions of Gwaradzimba has been to deny ARL access to any income from Zimbabwe.
The decree that allowed the state to seize control of ARL’s assets initially had no provision for any access to the Courts and as such ARL had no recourse against the government to recover its assets. The government through Gwaradzimba became aware that, in fact, T & N was still holding certain securities pursuant to the original deal.
The exclusion of the involvement of the Courts in the measures that were put in place by the GOZ was meant to give Gwaradzimba an opportunity to approach T & N on behalf of the GOZ to purchase the claims against T & N in respect of the original transaction.
The GOZ was aware of the risk of being exposed if it tried to litigate in England in its own name. A simplistic view was taken that ARL had defaulted in its purported payment obligations in respect of the purchase price.
In order to give the regulations introduced by President Mugabe of being fair, certain obligations were imposed both on the Minister and upon the Administrator in dealing with the reconstruction orders.
The decree that allowed the state to seize control of ARL’s assets initially had no provision for any access to the Courts and as such ARL had no recourse against the government.
After AMG had concluded an agreement with T & N, the regulations were amended in November 2004 with the introduction of Section 7A into the Temporary Regulations 2004. This new section required the Attorney General to apply to a judge in Chambers for confirmation of the reconstruction order at any time before the scheme of reconstruction was approved by the Minister.
When the law was enacted in March 2005, the obligation was imposed on the Minister instead of the Attorney General to make the required application for confirmation of the order.
However, at no time was an application made in terms of the Temporary Regulations 2004 for an approval by the Court.
The Act came into force on 4 March 2005 or six months after the control and management of SMM was divested from its directors.
Section 24 of the Act requires the Administrator to produce a scheme of reconstruction no later than two months after the commencement of the reconstruction and must present it to a joint meeting of creditors and members. It must then be submitted to the Minister who may approve this scheme or require variations to be made.
In the SMM case, the scheme reconstruction was only presented to a purported meeting of creditors and members (the latter being represented by AMG notwithstanding the fact the UK litigation had not been completed) on 24 June 2005 and the papers filed for the confirmation of the scheme show no evidence that the scheme was approved by the Minister prior to the presentation to Court.
No notice was issued to shareholders as required by law. The application for confirmation was filed on 2 November 2004 or three days before the conclusion of the SSA.
The identity and status of AMG
Although the decision to place SMM under state administration was taken by political players, the involvement of AMG, a shelf company incorporated by Gwaradzimba, in the SMM affair seems to have been motivated by a desire on the part of the government to disguise the role of the state in the UK in the expropriation of ARL’s assets.
In response to a question in Parliament, Chinamasa had this to say about AMG: “It is true that the company (AMG) he is referring to acted as a nominee of the GOZ to acquire a controlling interest in T & N which is a shareholder in SMMH – that is correct and the acquisition has been done.”
It was the intention of the government that at the end of the reconstruction, the total assets of the SMM group would be held as to 80% for the benefit of the GOZ and as to 20% or the diluted holding of SMMH pursuant to the UK transaction for the ultimate benefit of unspecified beneficiaries.
AMG is a paper company whose financial obligations have been met exclusively by the GOZ through the instrumentality of the RBZ. The legal costs estimated at US$1.5-2 million and the purchase price of US$2 million have all been provided by the state.
Link between the GOZ and AMG
Apart from the financing, the link between the GOZ and AMG is exposed in a letter dated 5 May 2005 addressed to the Inter-Ministerial Committee on SMM chaired by Chinamasa.
It is stated in paragraph 2.9.4 of the said letter as follows: “Legally, ARL defaulted and was in breach of the Deposit and Charge over the agreement. The ownership of SMMH and THZH had, therefore, and for all intents and purposes, reverted to T & N as a result of the default.” The decision of the court is clearly at variance with the position of Gwaradzimba. It raises the question of the kind of legal advise that Gwaradzimba relied upon to arrive at the conclusion that ARL had defaulted and, therefore, without any court involvement, ownership of SMMH had reverted to T & N.
Paragraph 2.9.5 “From the Administrator’s point of view, identifying the members of SMM was a critical part of reconstruction process. The Administrator is required to meet with members indentified T & N as a member for the purposes of the Reconstruction.” However, the legal position was that SMMH was the lawful shareholder of SMM.
Paragraph 2.9.6 “Administrator sought the permission of the Committee to do a presentation to members in terms of the Statutory Instrument 187 of 2004 to T & N. Sought permission of the Committee to negotiate with T & N, SPA covering the UK covering the UK companies, to prevent the possible disposal of T & N’s interests in those companies and, hence, in SMM third parties who would have taken over SMM. The proposed SPA was to be done in the name of AMG and was to be funded by the GOZ. These requests were granted by the Committee.” If anyone wanted confirmation of the manner in which public finances are now being conducted, this is clear evidence that the rights AMG sought to assert in the UK were not its own.
Paragraph 2.9.7 “In November 2004, the Administrator met with members of Kroll, the Administrator of T & N and presented to them SMM’s statement of affairs as at 6 September 2004 as well as the rational for the Minister placing the company under administration.” The fact that Kroll gave audience to AMG, a front for a government that believes is under sanctions from the UK government, speaks volumes about the effectiveness of the alleged sanctions. Although Kroll knew and must have known about the link between the GOZ and AMG as confirmed by an official record of the discussions, this did not deter the company from cutting a deal with AMG. The RBZ was represented in the negotiations by Mr. Chiremba confirming the direct role of the RBZ.
Paragraph 2.9.9 “Resulted in GOZ, through AMG, becoming the rightful 100% owner of the UK companies and, therefore, the SMM and Endurite group of companies. The nomination of AMG to transact with T & N on behalf of the GOZ’s behalf is in accordance with the provisions of the Section 26(2) of the Reconstruction of State-Indebted Insolvent Companies Act Chapter 24:27.”
From the above, the direct role of the GOZ in the UK litigation is not in doubt. What is clear is that the UK jurisdiction is porous and receptive to the exportation of expropriation laws from foreign states that are subject to targeted sanctions.
Although Gwaradzimba has been vested with powers to cause me to be arrested in Zimbabwe, I was able to share the same bench in the UK courts with him on several occasions. One gets to appreciate the value of investing in the rule of law.
The SMM saga has helped me to better understand what Zimbabwe would require to lift itself out of the current quagmire.
To the extent that a black government can act in the manner it has acted in relation to SMM, it is important that this experience is shared so that collectively we can make better judgments about the kind of changes that are necessary for the country to move forward.
At every stage of the SMM debacle, Chinamasa has been the instrumental person. It is not accidental that the same Chinamasa is an indispensible person for ZANU-PF going forward and one can only imagine the kind of harm that awaits the country if the person is not exposed. Gono’s hand is all over the case not only as a facilitator in respect of payments but as a chief architect in manufacturing the externalization charges that triggered the chain of events leading to the expropriation of ARL’s assets.
The kind of Zimbabwe that many expected to emerge from the womb of the colonial state has regrettably been hijacked by a few wise men. I am acutely aware as I was in 1996, that the GOZ was not ready to embrace the emergence of a black corporate class and being one of the pioneers, I proceeded to negotiate the acquisition fully cognizant of the dangers ahead.
It is ironic that the GOZ has sought to argue that ARL should not have diversified its operations and in so doing create more Zimbabwean jobs. Rather, it has contented opportunistically that the diversification and job creation was not in the national interests and ARL should have used the funds so used in the diversification to pay to T & N the remaining balance forgetting that the foreign exchange regulations put in place by the same government prohibited such external payments.
It is significant that Chinamasa had this to say in parliament in relation to ARL’s diversification and expansion drive: “If he had run the operations in a prudent manner, he would have been able to come out of debt, but he did not. There were huge interests where he would go into SMMH, dip into the till to go and buy other things like Schweppes instead of ploughing back into the company what would have been made from the sales of the proceeds of the company. That was not being done. Instead, the money was being used to buy other companies (not to enrich me) and he lost control completely to the creditors and we happened as a State to be one of the creditors.”
It ironic and significant that this statement is coming from a Minister in a government that has been universally credited for plunging the country into an unprecedented economic crisis and yet Chinamasa has not mustered enough courage to tell his boss what time it is. Is the GOZ in control of the economy? Is it making decisions that promote and protect the country’s future? Was national purpose has been served by the state’s involvement in the affairs of SMM? How much has the state spent so far in its attempt to nationalize assets held by a black person while purporting to be committed to indigenization?