IN THE HIGH COURT FOR ZAMBIA 2009/HPC/0322 AT THE COMMERCIAL REGISTRY
HOLDEN AT LUSAKA
(Civil Jurisdiction)
BETWEEN:
DEVELOPMENT BANK ZAMBIA PLAINTIFF
AND
JCN HOLDINGS LIMITED 1st DEFENDANT
POST NEWSPAPER LIMITED 2nd DEFENDANT
MUTEMBO NCHITO 3rd DEFENDANT
BEFORE THE HON. JUSTICE NIGEL K. MUTUNA ON 19th DAY OF APRIL, 2012
For the Plaintiff : Mr. V.B. Malambo SC of Messrs
Malambo & Company
For the First & Second Defendant : N/A
For the Third Defendant : N/A
Cases referred to:
1. Nkhuwa –VS- Lusaka Tyre Services (1977) ZR page 43
2. Mazembe Tractor Company Limited –VS- Meridian BIAO Bank Limited (in Liquidation) SCZ 8/209/97 (unreported)
3. Yeoman Credit Limited Vs Lalter and another (1961) 2 All ER page 294
4. Pao On and Others Vs. Lau Yiu and another (1979) 3 All ER page 65
5. Reandon Smith Line Limited Vs Hansen Tangen and Others (1876) 3 ALL ER page 570
6. Mazoka and Others Vs. Mwanawasa and Others ( 2005) ZR page 138
Other authorities referred to:
1. Harlsburry’s Laws of England 4th Edition, re-issue Volume 20
2. Halsburry’s Laws of England 3rd Edition, Volume 18
3. Companies Act Chapter 387 of the Laws of Zambia
4. Legal Practitioners’ Practice Rules 2002, Statutory Instrument No. 5 of 2002
5. High Court Act, Chapter 27 of the Laws of Zambia
The Plaintiff, Development Bank of Zambia, commenced this action by writ of summons supported by a statement of claim issued on 6th May, 2009 against the three Defendants namely, JCN Holdings Limited Post Newspapers Limited and Mutembo Nchito, the First, Second and Third Defendants, respectively.
The endorsement on the Writ of Summons is for the following reliefs;
“(1) The sum of K14 Billion.
(2) Interest at the contracted rate.
(3) In the alternative, for an order that Mr. Mutembo Nchito executes a
Guarantee or be deemed to have executed the guarantee under clause 8.6 of the Syndication Loan Agreement.
(4) An Order that Mr. Mutembo Nchito pays the sum of US$3.0 million
under the Personal Guarantee.
(5) Such order as the Court may deem just and equitable.
(6) Costs of the action.”
The Defendants in response did, on 9th September, 2009, file memoranda of appearance and defences.
The facts as contained in the statement of claim are as follows. The Plaintiff is a development bank established pursuant to the provisions of the Development Bank of Zambia Act, Chapter 363 of the Laws of Zambia. It is engaged in business of making available long, medium and short term finance and equity investment for economic development. The First Defendant is an investment company incorporated in Zambia and, at the material time, a shareholder in a company known as Mine Air Services Limited trading as Zambian Airways, hereinafter referred to as the company. The said company is owned by among others, the First and Second Defendants.
The Third Defendant and the First and Second Defendant’s counsel on record, one Nchima Nchito are shareholders of Zambian Airways Limited, a company incorporated in Zambia hereinafter referred to as ZA. The two own 50% each of the shareholding in ZA. Further, in all their dealings with the Plaintiff, the company and ZA, were represented by the Third Defendant who was described by the parties as the key promoter of the company.
In an effort of expanding its operations by acquisition of new equipment, the company trading as ZA did in or about 2007, approached Investrust Bank Plc to syndicate a loan facility in the sum of USD 5.5 million in its favour. In compliance thereof, Investrust Bank Plc as lead bank put together a consortium of banks as lenders comprising itself, Intermarket Banking Corporation (Z) Limited, and the Plaintiff (the lenders). The loan was to be secured by way of fixed debentures over assets of the company trading as ZA as follows; two Boeing Aircrafts registration numbers 9CJ JCN and 9CJ JOY; subordination of shareholders loans to the lenders; assignment of receivable duly executed; personal guarantee by the Third Defendant for the full value of USD 5.5 million; and key man insurance, of the key promoter being the Third Defendant for the period provided in the various offer letters from the lender banks who were party to the transaction. The Plaintiff’s portion of the loan was in the sum of USD 3 million was at the material time equivalent to K14 billion. This amount was duly drawn and utilized by the company. By the syndication loan agreement signed by the company trading as ZA and the lenders on 3rd November 2007, the lenders had agreed to share the securities pledged on a pari passu basis.
Despite the injection of the USD 5.5 Million into the company trading as ZA, by mid 2008 it was still facing serious liquidity problems and was in arrears of repayment of both principal and interest on the sums advanced by the Plaintiff. Further, although by clause 8.6 of the syndication loan agreement executed by the Plaintiff, the Third Defendant was obliged to give a personal guarantee for the repayment of the loan for the full value of the USD 5.5 Million, he has not executed the personal guarantee envisaged under the agreement. This is notwithstanding the fact that he executed the syndication loan agreement on behalf of the company trading as ZA. As a result of this the Plaintiff suffered a diminution in the security offered by the company for the due repayment of the loan and the Plaintiff is entitled to call upon the Third Defendant to execute the guarantee as agreed by the parties.
Following default by the company trading as ZA, in the repayment of the loan and at its request, the Plaintiff agreed to participate in the restructuring of the capital of the company trading as ZA. The effect of the said restructuring was that the Plaintiff’s debt to the company trading as ZA would be converted into equity, effectively making the Plaintiff a shareholder in the company. This was in consideration of the First and Second Defendants executing an equity buy-back guarantee in favour of the Plaintiff by which they would undertake to buy back the Plaintiff’s equity, in the event of occurrence of any default event. This arrangement was by way of a common stock equity facility (the facility). The restructuring was necessary and a condition precedent to the company trading as ZA accessing further loans from Finance Bank (Z) Limited to fund working capital for the company trading as ZA.
The other conditions of the restructuring included the following: the Plaintiff’s conversion of its portion of the loan to the company into common stock equity in the company; the said common stock equity was in the sum of K14 billion redeemable at the Plaintiff’s discretion with interest calculated at the then Government of the Republic of Zambia Treasury Bill rate for 182 days pegged at 16% per annum plus 8% margin or the floor rate of 20% per annum, which ever is the higher; the First and Second Defendants jointly and severally guaranteeing the repayment to the Plaintiff of the K14 billion in any of the circumstances referred to in the offer letter dated 6th October, 2008 as default events; and the Plaintiff in consideration of Finance Bank (Z) Limited lending to the company trading as ZA the sum of USD 3 million, relinquishing its interest in the securities securing the loan to Finance Bank (Z) Limited.
Subsequently, and pursuant to its obligations in the facility, the Plaintiff relinquished its interest in the securities and handed them over to Finance Bank (Z) Limited, which in turn availed the company the further sum of USD 3 million. The said sum was drawn and utilized by the company trading as ZA.
On 13th October, 2008, the First and Second Defendants executed equity buy back undertakings in accordance with their obligations under the facility and by way of securing the interests of the Plaintiff. These equity buy-back undertakings provided inter alia, that the First and Second Defendants jointly and severally undertook to buy back the equity from the Plaintiff, as may be determined in accordance with the terms of the shareholders’ agreement; in the event that the shareholders’ agreement is not executed the buy-back will be determined by Plaintiff. The undertakings to be valid and legally binding on them until they execute the irrevocable joint and several share buy back guarantee by all shareholders of ZA; and buy back the equity from the Plaintiff on demand upon presentation of reasonable notice from the Plaintiff to do so.
On or about 10th January, 2009, the company informed the lenders that their board had resolved to suspend the operations of the ZA. As a consequence of this and the Plaintiff’s perception of such act as being default, the Plaintiff made a demand for payment against the First and Second Defendants in terms of the undertakings they made. The demand was made by way of letter dated 13th January, 2009. Notwithstanding the said demand, the First and Second Defendants have failed to make the payment.
In their defence, the First and Second Defendants admitted the fact that there was an arrangement for the syndication loan as alleged by the Plaintiff. They also admitted that the loan was secured as alleged by the Plaintiff but deny the allegation that the lenders agreed to share the securities on a pari passu basis. The First and Second Defendants also admitted that the company trading as ZA faced serious liquidity problems by mid 2008, despite the injection of the USD5.5 Million. They however, attribute this to an increase in international aviation fuel prices.
As regards the facility, the First and Second Defendants admit executing it by way of consideration for the Plaintiff’s participation in the capital restructuring transaction. They averred further that the facility was for purposes of providing an exit mechanism for the Plaintiff as it did not desire to be a shareholder in ZA in perpetuity. It was executed subject to the legal opinion of independent counsel as demanded and chosen by the Plaintiff. That negotiations on the terms and conditions of the contract of the facility would be concluded following the legal opinion. It was also averred that, the conditions attached to the facility and financial terms thereof, were not concluded and were subject to negotiations which never took place. Further, there were no guarantees that were put in place and as such, the facility is not binding for want of conclusion of the negotiations, conversion of the debt into shares and issuance of shares to the Plaintiff. As a result of this, the facility is impossible to perform as there are no shares that can be bought back. The First and Second Defendants are therefore, not liable and the Plaintiff’s recourse lies with the company trading as ZA.
In his defence, the Third Defendant does not deny that a syndication loan agreement was entered into. He also admits that one of the conditions thereof was a personal guarantee by himself for the full value of the loan of USD 5.5 Million. The Third Defendant also admits that the company was facing serious liquidity problems notwithstanding the injection of USD 5.5 Million into its operations. He however, attributed this situation to the increase in international aviation fuel prices.
The Third Defendant proceeded to aver as follows: that in terms of clause 8.6 of the syndication agreement his obligation to guarantee the loan fell away if the company raised a minimum of USD 4 Million. He would in this respect, at the trial: demonstrate, that the company raised at least USD 6 Million in fresh equity capital subsequent to the syndication agreement; he did not cause the Plaintiff diminution in security as a result of his refusal to execute the guarantee; is under no obligation to execute the personal guarantee; and is not liable to pay the Plaintiff the sum claimed.
The matter came up for trial on 26th March, 2012, and when it was called up, counsel for the First and Second Defendants requested to see the Court in chambers. This request was declined which prompted the Third Defendant who is counsel and was acting in person, to apply for an adjournment pending inquiry into the manner in which the record on this matter was allocated to this Court. The Court declined the application for an adjournment, whereupon counsel for the First and Second Defendants and the Third Defendant stormed out of the Court room. Prior to this they uttered the following words, that is to say;
The Third Defendant:
“My Lord then I have no reason to sit in this Court. May I be excused. You
can do what you want.”
Mr N. Nchito (Counsel for the First and Second Defendants).
“In the same event My Lord we are seeking leave to leave the Court. The Court may proceed in the way that it deems appropriate.”
Mr F. M’membe (Co-counsel for the First and Second Defendants).
“It applies to ourselves My Lord. We cannot render ourselves under the execution of an axe willingly. It will be reckless on our part.”
By the said words and actions, the Court found that the Defendants were not willing to utilize the opportunity for defending themselves and in so doing were
abandoning their defenses. In making the foregoing finding this Court did take into consideration, as the record will show, the persistent procrastination by the Defendants. This is so, in that despite the Defendants indication at the hearing of 25th August, 2011, that they did not have a problem with this Court adjudicating upon the matter and the trial dates being agreed by all parties, they persistently requested for adjournments. Further, these motions for adjournments were made in contravention of the rules of the commercial list which require a party to file a motion for an adjournment ten clear days before the hearing. For some inexplicable reason theDefendants appeared to be of the opinion, which they exhibited by their conduct, that they had a better and superior standing as against the Plaintiff before this Court and were clearly intent on derailing the proceedings at every stage. This of course is contrary to the tenents of justice which demand that all parties are equal before the law and militate against attempts by a party to unnecessarily delaying the dispensation of justice. By the said conduct the Defendants’ advocates and the Third Defendant displayed their unwillingness to have the matter heard which degenerated to the level of their storming out of The Court room when the Court insisted on proceeding. Their conduct is not only contemptuous of this Court but also a serious misconduct on the part of counsel as officers of the Court as their said actions were calculated at frustrating the administration of justice. The Courts have also for some time now frowned upon such conduct as was demonstrated in the case of Nkhuwa –VS- Lusaka Tyre Services (1) where the Court made the following observation;
“It is regrettable that in recent years Legal Practitioners in this country have approached the need to comply with the rules as to time with complete non chalance. This Court has had occasion in the past to comment adversely on the attitude of Legal Practitioners to compliance with other rules of procedure but it is time that all Legal Practitioners were made to understand that where the rules prescribe time within which steps must be taken these rules must be adhered to strictly and those practitioners who ignore them will do so at their own peril”
In the unreported case of Mazembe Tractor Company Limited –VS- Meridian BIAO Bank Limited (in Liquidation) (2), the Supreme Court made similar onservations at page 7 as follows;
“The rules are often augmented by Orders for Directions, including Orders made by a Judge in the exercise of the Court’s inherent Jurisdiction to control the proceedings before itself. The Judge’s Order clearly stand on a higher footing than the rules and it is extremely naïve litigant who can think of disobeying and challenging the authority of the Judge in his own Courtroom without consequences”
Therefore such conduct cannot be counternanced by this or indeed other Courts and neither is it acceptable practice at the Bar. This is evident from Rule 32 of the Legal Practitioners’ Practice rules 2002 which specifically prohibits such conduct. It states in this respect as follows:
“A practitioner shall not –
(a) engage in conduct whether in pursuit of the profession or otherwise which is:
(i) …
(ii) prejudicial to the administration of justice; or
(iii) likely to diminish public confidence in the legal profession or the administration of justice or otherwise bring the legal profession in disrepute; …”
This Court is not constrained from taking appropriate action and urges the Legal Practitioners’ Committee of the Law Association of Zambia to take note of and follow up the misgiving I have expressed.
Further, the Defendants’ conduct was precipitated by the fact that as counsel they took on a matter in which there was clearly a likelihood of there being a conflict of interest. My finding is based on the fact that counsel for the First and Second Defendants Mr N. Nchito is not only a shareholder and director in the First Defendant and ZA but he is also a shareholder in the company, Mine Air Services Limited. This is the case with the Third Defendant who in all three companies has the same status as Mr N. Nchito. This is evident from the Companies Registry Computer printouts at pages 133, 137 and 138 of the Plaintiff’s bundle of documents and indeed the pleading. As such shareholders and directors, the two should not have assumed the role of counsel because the companies in which they have vested interest in are the subject matter of this dispute. They can not therefore be expected to be objective and professional in the discharge of their functions as counsel. Mr F. M’meembe as co counsel for the First and Second Defendant is similarly circumstanced, since he is a director and shareholder in the Second Defendant (the Companies Registry Computer printout at page 135 of the Plaintiff’s bundle of documents refers). The actions of the three advocates are a clear violation of rule No. 29(1) of the Legal Practitioner’s Practice Rules 2002 which states as follows:
“A Practitioner who has a separate business shall not do anything in the course of practice, or in the course of making and accepting referrals, connected with that separate business which is likely to compromise or impair any of the principles set out in rule 3.”
While rule 3(2) states inter alia as follows:
“A Practitioner shall not do anything in the course of practice or permit another person to do anything on the Practitioner’s behalf which compromises or impairs any of the following;”
“a) …
b) …
c) …
d) the good repute of the practitioner or of the legal profession
d)
f) the practitioner’s duty to Court”
The conduct of the two counsel for the First and Second Defendant and indeed the Third Defendant, who as I have stated earlier is also counsel, clearly compromised the good repute of the legal profession. Further, by the said action the three abrogated their duty to be courteous to the Court and indeed demean themselves in the practice of the law. Their conduct having been motivated by their stated interests in the companies that are in dispute in this matter is a clear violation of rule 29 aforestated. I once again urge the Legal Practitioner’s Committee to investigate the said violation of the rules.
It was against this background as highlighted above that I proceeded with the hearing in the absence of the Defendants. In arriving at the said decision I was alive to the provisions of order 35 rule 3 of the High Court Act which states that:
“If the plaintiff appears, and the defendant does not appear or sufficiently excuse his absence, or neglects to answer when duly called, the Court may, upon proof of service of notice of trial, proceed to hear the cause and give judgment on the evidence adduced by the plaintiff, or may postpone the hearing of the cause and direct notice of such postponement to be given to the defendant.”
My obligations under the said order are to ensure that a party to proceedings has notice of the hearing and he is offered a forum to defend himself. The facts I have highlighted above indicate that these two requirements were availed to the Defendants but they spurned them. The Court is not obliged to cajole unwilling litigants such as the Defendants to defend themselves and neither was there procedural injustice occasioned to them when the Court proceeded in their absence.
At the trial, the Plaintiff called four witnesses. PW1 was Musenga Andrew Musukwa a legal practitioner and Bank Secretary/Legal Counsel for the Plaintiff. In his evidence he highlighted the role he played on behalf of the Plaintiff in the facilitation of the syndication loan to the company trading as ZA. This included issuing notices for the meeting that considered the loan application, convening it and preparation of the minutes. The testimony also highlighted the terms of the syndication loan and the documents executed in pursuit thereof. These were, the execution of the syndication loan agreement; the security sharing agreement; and assignment of receivables. PW1 went on to highlight the concerns raised by the Plaintiff following default by the company trading as ZA to pay the loan, the various meetings held in an attempt to remedy the default, and negotiations leading up to the agreement for the Plaintiff to convert its debt to equity, the share buy back agreement and the role played by the Minister of Finance in the said negotiations. This was finalized following execution by the parties of the relevant instruments and the release of its portion of the securities held by the Plaintiff to secure the loan to Finance Bank (Z) Limited which was a condition of the share buy back agreement. This would facilitate Finance Bank (Z) Limited giving the company trading as ZA a new facility of US D 3 million. Subsequently on 11th January, 2009, the company trading as ZA wrote a letter stating that it had resolved on 10th January, 2009, to suspend its operations. This action was an event of default in accordance with the common stock equity facility letter executed by one Nchima Nchito and Fred M’membe representing the First and Second Defendants. Pursuant to this default the Plaintiff demanded payment of the funds loaned out.
There was no cross examination in respect of PW1’s evidence.
PW2 was Abraham Mwenda who at the material time was the Managing Director of the Plaintiff. In his evidence he referred to the events and meetings that took place leading up to the agreement to restructure the Plaintiff’s debt to equity. One such meeting was with the Minister of Finance initiated by management of the company trading as ZA. The main purpose of the restructuring was to enable Finance Bank (Z) Limited extend further funding to the company. He went on to testify that: on 13th October, 2008, the First and Second Defendants as shareholders of the company trading as ZA indicated their acceptance of the Plaintiff’s common stock equity facility offer (the facility) and irrevocable undertaking to buy-back the equity from the Plaintiff. This was by way of endorsement of copies of the facility letter of offer and guarantee, subsequent to various meetings with the Third Defendant at which the financial difficulty of the company was highlighted, and the Third Defendant lobbied for speedy conclusion of the facility; on 11th January, 2009, the Third Defendant wrote to the Plaintiff, communicating the company’s decision to suspend its operations; and as a consequence of this decision the Plaintiff considered the action as a breach of clause 3.1.2 of the facility and therefore issued a demand notice.
There was no cross examination following the testimony of PW2.
PW3 was Caiaphas Mwanakwale Habasonda, Director of Credit and Portfolio Management in the Plaintiff. His evidence focused on how he monitored the account of the company trading as ZA. He confirmed the testimony of PW1 and PW2 as well as the averments made in the statement of claim. In so doing he highlighted the various meetings he had with the Third Defendant for purposes of finding a solution for the company’s financial difficulty. Further, he recalled how the Third Defendant persistently pressured him to finalize arrangements for the facility to enable the company access the funds from Finance Bank (Z) Limited. These meetings finally led up to the facility letter being issued by the Plaintiff. He also explained how an assessment of the security led him to conclude that the Plaintiff would not recover the funds lent out on account of other preferential creditors to the company trading as ZA, such as Zambia Revenue Authority, and the poor state of the aircrafts pledged as security. He ended his testimony by stating that the effect of cessation of business by the company trading ZA, meant that the Plaintiff could not pursue the route of converting the debt into equity because the object of the transaction had been extinguished. Further, the Plaintiff could not revert to the loan as it had relinquished the security in respect thereof to Finance Bank (Z) Limited.
There was no cross examination following the testimony of PW3.
PW4 was Hepzibah Similenda Namwiindwa Beyani, the Head Credit, in the Plaintiff. In her testimony pointed out the following: the date when the first payment of interest on the loan was due to the Plaintiff from the company trading as ZA and the amount; the date when the first principle installment fell due and the amount; the default by the company; and the date and amount paid on the loan. She also recounted the events leading up to the restructing of the loan and the demand made by the Plaintiff.
There was no cross examination following the testimony of the PW4.
At the close of the hearing I directed the Plaintiff to file closing submissions within 14 days. Pursuant to the said directive counsel for the Plaintiff, Mr. V.B. Malambo SC filed submissions on 10th April, 2012.
In the Plaintiff’s final submissions, counsel for the Plaintiff Mr. V.B. Malambo SC began by stating the case against the First and Second Defendants. He did so by running through the correspondence passing between the parties, leading up to the facility letter. It was argued, in this respect, that; the clear and unambiguous terms of the facility letter were unconditionally accepted by the two Directors of ZA one Fred M’membe and one Nchima Nchito whose signatures were witnesses by the Third Defendant; the facility letter was a reaction by the Plaintiff to an offer made by ZA management for the Plaintiff to take up equity in ZA; one of the terms material to the Plaintiff’s case is the redemption or release clause in the facility letter; and the only security demanded by the Plaintiff for this facility was an open ended irrevocable joint and several shareholder buy-back guarantee for K14 Billion plus interest at the agreed rate. Counsel proceeded to argue that it is clear from the negotiations held by the parties that they envisage the execution of a number of necessary contracts to define their relationship. One such document was the security documentation to be executed between the Plaintiff and the First and Second Defendants as guarantors to secure repayment of the sum of K14 billion in the event of default. It was submitted that although the parties never got to the stage of executing the actual irrevocable joint and several buy-back guarantees the undertakings signed by the ZA and indeed the two Defendants, sufficiently protect the Plaintiff and are valid and legally enforceable. These undertakings counsel argued, are the resolution of ZA board dated 9th October 2008 (page 89 of the Plaintiff’s bundle of documents) and the undertakings to buy-back equity from the Plaintiff dated 13th October 2008, executed by both the First and Second Defendants. It was also argued that the legal effect of the said documents was that they created a contract of indemnity as opposed to guarantees. This was on account of the fact that, the First and Second Defendants by the said documents pledged to hold the Plaintiff harmless for any loss that may arise as a result of its converting the debt owed by ZA into equity. In articulating the said argument, counsel drew my attention to the cases of Yeoman Credit Limited –VS- Lalter and another (1) and Pao On & others –VS- Lan Yin & another (2).
Counsel went on to consider the First and Second Defendants’ defence which asserted that the terms of the buy-back agreement were still being negotiated and had not been concluded. Therefore, the agreement was not enforceable. He argued in this respect that, the Plaintiff had provided consideration for the agreement because it did not only forgo its right to enforce its creditor’s rights against ZA, but also relinquished its right over the securities provided to it by the company to Finance Bank (Z) Limited. This was to enable ZA access further lines of credit.
The second ground that counsel argued to demonstrate the failure of the First and Second Defendants’ defence lay in the fact that, the Plaintiff not only participated in the equity of ZA, but following perforation of the initial security documents, ZA acknowledged the Plaintiff’s equity interest. This is evident from the letter written by the Third Defendant to the Managing Director of National Airports Corporation Limited dated 4th November, 2008. It was his further argument that the First and Second Defendants could not avoid liability on the basis that the shareholders’ agreement was not executed because the undertaking to buy back equity was valid and binding even in the absence of the shareholders’ agreement.
The third ground advanced by counsel was that, when executing the buy back guarantee letters, the officers of the First and Second Defendants were acting as fully informed businessmen. This was clear from the evidence of PW1 which highlighted the evidence leading up to the execution of the documents by the officers of the First and Second Defendants. It was argued that, the officers must therefore be held to their bargain as the defense of duress is unavailable to them. He drew my attention to the case of Pao On (2) and Readorn Smith Line Limited –VS- Harsen – Tangu & others (3) in articulating this point.
As regards the Third Defendant’s liability, counsel began by highlighting the defence advanced by the Third Defendant. He argued that the Third Defendant had averred that in terms of clause 8.6 of the syndication agreement his obligation to execute a personal guarantee fell away if the company raised a minimum of USD 4 Million fresh equity capital. Further that at the trial he would demonstrate that the company raised at least USD 6 Million in fresh capital. Counsel argued that the said defense is untenable for two reasons. The first is that clause 8.6 of the syndication loan agreement does not contain provision for release of the Third Defendant from executing a personal guarantee. As such the Third Defendant’s obligation is without conditionality. Secondly, at the close of trial of this matter, the Third Defendant did not provide evidence that USD 6 Million was injected into the equity of ZA as pleaded. Counsel’s further argument was that the only evidence on record of PW1 demonstrated that, pursuant to a report rendered by Price Waterhouse Coopers, ZA was essentially insolvent.
In conclusion counsel argued, by reason of the Third Defendant’s failure to sign the guarantee as per clause 8.6, the Plaintiff suffered a diminution in value of the security offered by ZA and equity treats that as done that ought to have been done. Therefore, this Court should order the Third Defendant to execute the guarantee or deem the personal guarantee as having been so executed and therefore order him to pay the sum of USD 3 million.
I have considered the pleading and testimony tendered by the Plaintiff’s witness. It is clear from the said pleading and testimony that certain facts are not in dispute as follows: that (1) the Plaintiff extended a loan facility of USD 3 Million to the company trading as ZA (2) agreements were executed to evidence and secure the said loan (3) the company trading as ZA experienced financial difficulty despite the loan being availed to it (4) there was default on the part of the company trading as ZA in servicing the loan (5) a proposal to restructure and convert the loan to equity was discussed by the parties and significant headway made in its implementation (6) one of the conditions for the restructuring was that the Plaintiff would relinquish its portion of the securities offered by ZA for the loan to Finance Bank (Z) Limited (7) the restructuring was for purposes inter alia, of ZA accessing funding from Finance Bank (Z) Limited to meet its operational costs (8) the Third Defendant was the key promoter of the company trading as ZA and indeed the brains behind the two arrangements (9) soon after the Plaintiff released the securities to Finance Bank (Z) Limited and ZA accessed further funding, a resolution was passed by the ZA board suspending its operations and (10) following this action a demand was made by the Plaintiff against the First and Second Defendants to buy back the equity it holds in ZA.
Notwithstanding the foregoing, the Defendants have denied liability as follows: the First and Second Defendants on the ground that there was no consideration passing from the Plaintiff to them because the Plaintiff did not convert its debt to ZA into shares. The share buy-back agreement sought to be enforced by Plaintiff is therefore impossible to perform and therefore the Plaintiff’s remedy lies with the company; and the Third Defendant on the ground that he did not sign the personal guarantee. Further that he was released of the personal guarantee upon the company raising fresh equity capital to the tune of USD 6 million.
The undisputed facts I have highlighted in the preceding paragraphs demonstrate, inter alia, that there was default on the part of the company in respect of the syndication loan agreement and the facility. In this judgment therefore, I only have to make a determination as to whether or not the Defendants are liable for the funds claimed.
In pursuit of determining the issue stated in the preceding paragraph I have examined the various agreements and documents produced in the Plaintiff’s bundle of documents which set out the relationship and obligations of the parties. The first of such agreement is the syndication loan agreement made between the company trading as ZA, Investrust Bank Plc, Intermarket Banking Corporation (Z) Limited and the Plaintiff. This agreement is at page 26 of the Plaintiff’s bundle of documents. By the said agreement the two banks and the Plaintiff undertook to lend to the company the sum of USD 5.5 million. The purpose of the loan was to enable the company purchase two Boeing 727-244 aircrafts.
The securities that were to be offered for the loan are contained in clause 8 and they are, inter alia, a personal guarantee by the Third Defendant and a common charge by the Plaintiff and other lenders over of all the assets of the company trading as ZA.
Lastly the agreement was executed among others by the Third Defendant for and on behalf of the company trading as ZA.
From what I have stated in the preceding paragraphs with respect to the syndication loan agreement, it is clear that it places an obligation upon the company to repay the loan. It also sets the stage for the providing of a personal guarantee by the Third Defendant.
The other document that is crucial to the determination of this action is the letter titled common stock equity facility (the facility). The said letter is at page 77 of the Plaintiff’s bundle of documents and should be read with the documents at pages 92 and 95, which are the undertakings to buy-back equity from the Plaintiff made by the First and Second Defendants. The facility letter was conditional, among other things, to execution of a shareholders’ agreement.
It is clear from the pleading and evidence, that the facility evidenced the agreement by the parties to restructure the Plaintiff’s loan into equity following default by the company trading as ZA. By the said facility letter and the other two letters at pages 92 and 95 of the Plaintiff’s bundle of documents, the First and Second Defendants undertook to buy back the equity converted from the loan and held by the Plaintiff in the company trading as ZA. The First and Second Defendants undertook to buy back the equity at the discretion of the Plaintiff and upon inter alia, occurrence of any event of default as provided in clause 9 thereof. The undertakings at pages 92 and 95 of the Plaintiff’s bundle of documents signed by the First and Second Defendants stipulated further, that should the shareholders’ agreement not be secured, the buy back will be determined by the Plaintiff.
Having highlighted the crucial documents, I now turn to determine whether or not the Defendants are liable. In doing so I will begin by considering the Third Defendant’s position as he initiated and orchestrated the two agreements I have referred to in the preceding paragraphs.
The Plaintiff’s claim as it relates to the Third Defendant is firstly for payment of the sum of K14 billion plus interest. Secondly and in the alternative for an order that he executes a guarantee or be deemed to have executed the guarantee under clause 8.6 of the syndication loan agreement. Arising from the second claim, the Plaintiff also claims for an order to compel the Third Defendant to pay the sum of USD 3 million.
I will start by determining the second claim which is anchored on clause 8.6 of the syndication agreement. The clause is the security clause and is at page 33 of the Plaintiff’s bundle of documents and it states as follows:
“Personal Guarantee of Mr. Mutembo Nchito for the full value of USD 5,500,000.00”
This clause is a clear intention by the Third Defendant to offer a personal guarantee for the loan to its full value. The intention is restated by the fact that the Third Defendant executed the syndication loan agreement on behalf of the company trading as ZA. He cannot therefore be heard to say that he was not aware of it. However, as the undisputed facts show the Third Defendant did not execute a formal contract of guarantee. As such he cannot be held accountable on the guarantee. My finding is fortified on the learned authors of Halsbury’s Laws of England 4th edition re-issue volume 20 paragraph 145 at page 20 where under theheading form of contract of Guarantee it is stated as follows;
“The statute of Frauds (1677) provides that no action is to be brought by which to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person unless the agreement upon which the action is brought or some memorandum or note of it, is in writing signed by the party to be charged with it or by some other person thereunto lawfully authorized by him.”
It is clear from the foregoing that for a guarantee to be enforceable, must be in some form of memorandum or note which is signed by the guarantor. This was not the case in this matter as the undertaking contained in clause 8.6 made by Third Defendant to provide a personal guarantee was not subsequently formalized into a guarantee agreement or reduced to writing. Further the same authors of Halbury’s Laws of England 3rd Edition volume 18 stipulate that the existence of such memorandum or note is a condition precedent to an action premised on a guarantee. It states in this respect at page 433 paragraph 796 as follows:
“The existence of such a memorandum, before action is brought is however essential.”
A memorandum cannot therefore be executed after the fact and as such the prayer by the Plaintiff that the Third Defendant be compelled to execute the guarantee is untenable. The matter however, does not end there because the conduct of the Third Defendant in this whole episode cannot go without comment or consequence. The facts of this case demonstrate that he initiated, arranged and orchestrated the procurement of the funds by the company trading as ZA from the Plaintiff which he knew or ought to have known the company would not pay back. Having engineered the funding to company trading as ZA he proceeded to persuade the Plaintiff to convert its debt into equity for purposes of inter alia, the company trading as ZA accessing further funding from Finance Bank (Z) Limited. These actions by the Third Defendant are clearly evident from the letters at pages 59 and 61 of the Plaintiff’s bundle of documents. In the said letters the Third Defendant makes passionate pleas to the Plaintiff to convert its debt to equity. In the letter at page 59 he states in part as follows:
“In the light of the foregoing, I am very concerned that this process will take so long that it may be of no use by the time is concluded…”
“In the light of the Development Bank Zambia cash flow concern that has arisen in previous meetings in response to our request for a conversion of your debt to equity, I would now propose a restructuring of the debt that gives you preference shares with a coupon rate payable at times to be agreed.”
While the latter at pages 61 and 62 states in part as follows;
“I humbly request that we move to a decision on Zambian Airways in the next 24 hours… we make this drastic request because we need to release cash that will help for insurance and other operational critical payments by Tuesday 30th September 2008, without which we may be forced to park our aircraft and cease operations… I am begging you Sir to make a decision today or your decision may be of no use to either of us.”
(Underlining is the Court’s for emphasis only).
These letters were coupled with persistent visits and calls to the Plaintiff by the Third Defendant as the evidence of PW3 demonstrated. This witness, as his statement shows, was short of stating that he was irritated by the persistence of the Third Defendant.
The pleas and indeed the request for restructuring and release of the securities by the Plaintiff to Finance Bank (Z) Limited made by the Third Defendant, as his actions will later demonstrate, were not made in the interest of Plaintiff. They were made purely for the sake of the company trading as ZA accessing further funding from Finance Bank (Z) Limited following which the Plaintiff’s interest would be abandoned. Further, at all material times the Third Defendant knew that the company trading as ZA did not intend paying the debt. I make this finding of fact because, the facts reveal that soon after the Plaintiff’s confirmation of acceptance to convert its debt into equity and its release of the securities it held for the loan to Finance Bank (Z) Limited, pursuant to which the latter released funds to the company, the Third Defendant informed the Plaintiff and other syndication banks that the ZA board had resolved to suspend all its operations. This was by way of a board resolution by a board to which the Third Defendant was a member and its result was that the Plaintiff’s interests were no longer secure as it had already released the security. Further, the subject matter of the two agreements i.e ZA was destroyed and as such the agreement for the equity buy back could not be concluded. These actions I have highlighted above clearly demonstrate recklessness and callousness on the part of the Third Defendant which were calculated at ensuring that the company trading as ZA did not honour its obligation to the Plaintiff. It also demonstrates lack of good faith on his part and on the part of the other board members of ZA in their dealing with the Plaintiff as PW3 testified. These acts leave the perpetrator,the Third Defendant amenable to prosecution for a criminal offence under Section 357 of the Companies Act. The said section states as follows;
“(1) If an officer of a company who is knowingly a part to the contracting of a debt by the company has, at the time the debt is contracted, no reasonable or probable ground of expectation (after taking into consideration the other liabilities, if any, of the company at the time) of the company’s being able to pay the debt, the officer shall be guilty of an offence, and shall be liable on conviction to a fine not exceeding two hundred and fifty monetary units or to imprisonment for a period not exceeding three months, or to both.
(2) Where a person has been convicted of an offence against this section, the court, on the application of the liquidator or any creditor or member of the company, may make an order that the person shall be personally responsible, without any limitation of liability, for the debts or other liabilities of the company or for such of those debts or other liabilities as the Court directs.
(3) An order under this section may provide for measures to give effect to the liabilities of the person under the order, and in particular may provide that those liabilities shall be a charge on any debt or obligation due from the company to him, or on any interest in the company of which he has, directly or indirectly, the benefit.
(4) The Court may make such further orders as it thinks necessary to enforce any charge imposed under this section.”
The facts of this case in particular the financial state of the company trading as ZA demonstrate severe financial hardship and indebtedness. The Third Defendant was aware of this but went ahead to commit ZA to further debt. His actions as I have stated make him liable for prosecution under the aforestated section.
Further, the actions fall squarely in what is properly termed as misrepresentation. My finding is fortified by Blacks Law Dictionary 8th edition at page 1022 which defines misrepresentation thus;
“1. The act of making a false or misleading assertion about something, usu. with the intent to deceive. The word denotes not just written or spoken words but also any other conduct that amounts to a false assertion. [Cases: Fraud 9.] …
“ A misrepresentation, being a false assertion of fact, commonly takes the form of spoken or written words. Whether a statement is false depends on the meaning of the words in all the circumstances, including what may fairly be inferred from them. An assertion may also be inferred from conduct other than words. Concealment or even non-disclosure may have the effect of a misrepresentation ••• [A]n assertion need not be fraudulent to be a misrepresentation. Thus a statement intended to be truthful may be a misrepresentation because of ignorance or carelessness, as when the word ‘not’ is inadvertently omitted or when inaccurate language is used. But a misrepresentation that is not fraudulent has no consequences … unless it is material.”
The Third Defendant’s acts as catalogued above indicated that he misrepresented to the Plaintiff that the company trading as ZA would settle its indebtedness to the Plaintiff, when he knew or ought to have known that it would not. Further, the Plaintiff relied upon the misrepresentation which was material in view of the consideration provided by the Plaintiff to its detriment. For this reason I find that the Third Defendant is liable to settle what is owing to the Plaintiff.
In arriving at the finding in the preceding paragraph I am alive to the fact that the Plaintiff has not specifically pleaded misrepresentation, but the evidence led, which was not contested discloses and proves misrepresentation. I am therefore on firm ground in considering the evidence and making the finding that I have made. This is as per the holding in the Mazoka & others -VS- Mwanawasa & others (4) case in which the Supreme Court held as follows at page 140 to 141;
“In a case where any matter not pleaded is let in evidence, and not objected to by the other side, the Court is not and should not be precluded from considering it. The resolution of the issue will depend on the weight the Court will attach to the evidence of unpleaded issues.”
I now turn to consider the position of the First and Second Defendants. As the facts of this case will show after the company trading as ZA was availed the loan of USD 3 million by the Plaintiff it still experienced financial difficulty. This, as I have highlighted in the earlier part of the judgment, prompted the Third Defendant to prevail upon the Plaintiff to convert its debt into equity. The condition for this was, among other things, that the First and Second Defendants undertook to buy back the equity or redeem it from the Plaintiff in the event of one of the default events agreed upon occurring. The other condition was that upon conversion of the debt to equity the Plaintiff would also release the security it held which was provided by the company to Finance Bank (Z) Limited, which bank would in turn released funding to the company trading as ZA to meet its operational costs.
The Plaintiff proceeded to take steps in converting the debt into equity and prepared the facility letter which was signed by the First and Second Defendants and witnessed by the Third Defendant. Subsequently, on 13th October, 2008, the First and Second Defendants undertook to buy-back the equity from the Plaintiff by executing undertakings to that effect that are at pages 92 and 95 of the Plaintiff’s bundle of documents.
Having perused the said undertaking and the facility, I find that the First and Second Defendants executed legally binding documents and are liable to the Plaintiff in terms of the facility letter. In arriving at the foregoing finding I have considered the defense mounted by the two Defendants in their defenses filed herein that: the facility letter is not binding because the negotiations for same were not concluded; the shareholders agreement was not executed; and neither did the Plaintiff convert the debt into equity. I find the said defense untenable for the following reasons. Although they may have been outstanding issues the purpose of common stock equity facility was substantially performed by the parties in particular the Plaintiff to the extent I have stated in the earlier part of this judgment. The Plaintiff in this respect performed literally all of its obligations such as releasing the securities held in respect of the syndication loan agreement to Finance Bank (Z) Limited which enabled the company to acquire further funding from Finance Bank (Z) Limited. This was on the prompting of the Third Defendant who orchestrated the transaction on behalf of the two Defendants. This in my considered view demonstrates that the parties intended to be bound by the facility immediately. The letters written by the Third Defendant that I have referred to at pages J20 and J21 are further testimony of this. As such the facility is binding notwithstanding the outstanding issues. My finding is fortified by Trietel, The Law of Contract, by Edwin Peel which states at pages 60 to 61 as follows;
“Where it can be inferred that the parties intended to be bound immediately, in spite of the provision requiring further agreement, a binding contract can be created at once??¹; for the courts are “reluctant to hold void for uncertainty any provision that was intended to have legal effect.”
“Thus an agreement is not incomplete merely because if it calls for some further agreement between the parties.??º Even the parties ‘ later failure to agree on the matters left outstanding will vitiate the contract only if it makes the agreement “unworkable or void for uncertainty.”
I therefore agree with the argument by counsel for the Plaintiff that the facility is binding because the Plaintiff provided consideration and notwithstanding the outstanding issues.
Secondly, although the shareholders agreement was not executed the company acknowledged that the Plaintiff had become a shareholder as is evident from its correspondence to the managing director of National Airports Corporation Limited dated 4th November 2008 at page 114 of the Plaintiff’s bundle of documents. Further, the absence of the shareholders agreement did not nullify the undertakings made by the First and Second Defendants to buy back the equity because they provide for the determination of the agreement if the shareholders agreement are not executed. They state as follows:
“ In the event that the Shareholders Agreement is not executed the buy
back will be determined by the Bank.”
The bank in the said paragraph is the Plaintiff and this portion of the undertaking clearly shows that the Plaintiff’s right to enforce the undertaking is not taken away by the absence of the shareholders agreement. Further as I have demonstrated in the earlier part of this judgment, ZA’s board resolved to discontinue operations of ZA which meant that the shareholders agreement could not be concluded, as such it would have been redundant or impossible to achieve.
Lastly, the First and Second Defendants undertook to hold the undertakings as binding and valid until execution of the share buy-back guarantee. The undertakings state in this respect as follows;
“We,…, further undertake to hold this undertaking valid and Legally binding on ourselves until the execution of the irrevocable joint and several share Buy Back Guarantee…”
It is clear from this clause that the absence of a buy back guarantee does not take away the two Defendants’ liability or nullify the undertakings.
I accordingly enter judgment in favour of the Plaintiff, Development Bank of Zambia, against the three Defendants, namely, JCN Holdings Limited, Post Newspapers Limited and Mutembo Nchito, in the sum claimed of K14 billion. The said sum is to attract interest as agreed in the undertakings calculated at 182 days GRZ Treasury Bill rate, plus 8 per cent margin or a floor rate of 20 per cent per annum, whichever is higher, from date of writ of summons to date of judgment. Thereafter, at the current bank lending rate as determined by Bank of Zambia.
Leave to appeal is granted.
Delivered on the 19th day of April, 2012.
Nigel K. Mutuna
HIGH COURT JUDGE
