SMM Holdings (Pvt) Ltd was a mining company placed under reconstruction in September 2004 due to state indebtedness, mismanagement and inability to repay debts. The respondent was appointed administrator. After the reconstruction order, the administrator borrowed over US$3.6 million from the applicant (a South African company) through two loans to pay SMM Holdings' suppliers in South Africa and keep the company operational. Repayment was to be through the company's asbestos fibre products, with the applicant retaining 40% of each invoice. The loan tenure was 28 February 2010. SMM Holdings breached the loan terms and failed to repay. When the applicant sought leave from the administrator to institute legal proceedings to recover the debt in terms of s 6(b) of the Reconstruction of State-Indebted Insolvent Companies Act, the administrator refused. His reasons included that allowing such proceedings would "open a Pandora's box" as multiple other creditors might sue, and that once new funding was secured, the applicant's claim would be addressed. The applicant then applied to court to override the administrator's decision and grant leave to sue.
1. The administrator's decision of 28 August 2012 refusing leave in terms of s 6(b) of the Reconstruction of State Indebted Insolvent Companies Act was set aside. 2. The applicant was granted leave to institute proceedings against SMM Holdings (Pvt) Ltd for recovery of US$3,635,158.31 together with costs and interest. 3. The respondent was ordered to pay the costs of the application.
An administrator of a company under reconstruction who exercises discretion under s 6(b) of the Reconstruction of State-Indebted Insolvent Companies Act must act reasonably and fairly in accordance with s 3(1)(a) of the Administrative Justice Act. While the administrator's paramount consideration is to turn around the company's fortunes and free the State from obligations, this cannot be his singular consideration - he must strive to strike a balance with the interests of other stakeholders. An administrator's decision to refuse leave to sue that is concerned with self-preservation and designed to shield himself from consequences of his own infractions in incurring debts on behalf of the company is unreasonable, unfair and in breach of s 3 of the Administrative Justice Act. In determining whether to treat pre- and post-reconstruction obligations differently, it should not be the date when a particular debt was incurred that decides preferential treatment, but rather the circumstances surrounding the particular debt. A court may substitute its own decision for that of an administrator in exceptional circumstances where: (1) the end result is a foregone conclusion and referring back would waste time; (2) further delay would prejudice the applicant; (3) the administrator is fettered by bias or self-interest making it unfair to force submission to the same jurisdiction; and (4) the court is in as good a position as the administrator to make the decision.
The court noted that s 6(b) of the Reconstruction Act was evidently not designed to provide administrators of State-indebted companies with immunity from civil suits. The court observed that when an administrator is appointed and clothed with powers under s 6 of the Reconstruction Act, he is "in a sense, being empowered and authorised to be judge over his own cause" but must nevertheless remain objective. The court commented that the criteria suggested by counsel for factors an administrator should consider appeared "somewhat narrow" and "tailor-made to suit the particular circumstances of the applicant" and expressed preference for avoiding being "too prescriptive" with a "one-size-fit-all criterion." The court acknowledged the constitutional challenge to s 6(b) based on alleged violation of the right of access to courts under s 69(3) of the Constitution and the ongoing legal debate (including a pending appeal in Gurta AG v Gwaradzimba NO), but found it unnecessary to decide the constitutional issue having resolved the matter on administrative law grounds.
This case establishes important principles regarding the exercise of discretion by administrators of companies under reconstruction orders in Zimbabwe. It clarifies that administrators must act reasonably and fairly under the Administrative Justice Act when considering applications for leave to sue under s 6(b) of the Reconstruction Act. The judgment emphasizes that while administrators must focus on turning around company fortunes, they cannot ignore the interests of other stakeholders or use their powers for self-preservation. The case also provides guidance on when courts may take the exceptional step of substituting their own decision for that of an administrative functionary, particularly where the administrator has admitted the debt and has no defence. It addresses the treatment of post-reconstruction debts incurred by the administrator himself, holding that such debts should not automatically be subordinated to pre-reconstruction debts.