Cecil Madondo (In his capacity as the duly appointed Liquidator of Century Discount House Ltd) v Zimbabwe Banking Corporation

Century Discount House (CDH) operated a current account with Zimbabwe Banking Corporation (Zimbank) and enjoyed an unsecured overdraft facility. Zimbank granted CDH overnight accommodation facilities on an informal basis. By letter dated 11 March 2003, Zimbank advised CDH of conditions for such facilities, including the need for security, but did not insist on compliance initially. By November 2003, CDH was having problems regularizing its overnight position. On 5 December 2003, when CDH's account was overdrawn by approximately $12 billion, CDH delivered Grain Marketing Board (GMB) bills with a maturity value of $4 billion to Zimbank as security. On 30 December 2003, Zimbank dishonoured all CDH cheques. On 2 January 2004, the Reserve Bank of Zimbabwe closed CDH's doors. On 5 January 2004, Zimbank liquidated the GMB bills for $3,077,100,273.97. On 22 January 2004, the High Court placed CDH in liquidation at the instance of the Reserve Bank. The liquidator of CDH sought recovery of the full maturity value of the bills, arguing that the liquidation of the bills constituted an undue preference.

• Whether the facility granted to CDH was an overdraft or overnight accommodation
• Whether the delivery of GMB bills as security constituted a voidable preference under section 42 of the Insolvency Act
• Whether Zimbank's liquidation of the bills was done in the ordinary course of business
• Whether there was an intention to prefer Zimbank above other creditors
• Whether Zimbank had the right to liquidate the bills as owner/holder
• Whether the GMB bills were assets of CDH recoverable by the liquidator

1. The GMB bills with a face value of $4,000,000 (new currency) delivered to Zimbank at the instance of CDH on 5 December 2003 are declared to be the property of the applicant (liquidator). 2. The applicant is entitled to recover from Zimbank the full maturity value of the GMB bills plus interest from the date of maturity (3 March 2004) to date of payment in full at the Century Bank Limited minimum lending rate. 3. The respondent (Zimbank) is to bear the costs of this application.

A disposition of property made by a debtor within six months of liquidation that has the effect of preferring one creditor above another may be set aside under section 42 of the Insolvency Act if: (1) immediately after the disposition, the debtor's liabilities exceeded the value of its assets; and (2) the disposition was not made in the ordinary course of business and was intended to prefer one creditor above another. Where a creditor obtains security for a previously unsecured debt at a time when both parties are aware of the debtor's precarious financial position and inability to pay its debts, and subsequently liquidates that security knowing that liquidation is imminent and other creditors exist, such disposition constitutes an undue preference that will be set aside. A bank is not entitled to negotiate a bill deposited as security for an advance unless the pledgor has authorized such negotiation.

The court noted that it was not necessary to decide whether Zimbank's conduct amounted to a criminal offence under section 184 of the Insolvency Act, which criminalizes the disposal of assets with intent to defeat attachment or prejudice creditors. The court also observed that the arrangement between the parties, while initially structured as overnight accommodation, had evolved into something different in practice - an unsecured overdraft facility - demonstrating the court's willingness to look at the substance of banking arrangements rather than their formal characterization. The court's preliminary observations about jurisdiction (whether a Supreme Court judge could determine a High Court matter) and the explanation for the delay in delivering judgment provide procedural guidance but do not form part of the binding principle.

This case is significant in Zimbabwean insolvency law as it clarifies the application of section 42 of the Insolvency Act regarding voidable preferences. It establishes that informal overdraft arrangements between banks and their customers will be treated as overdrafts in law regardless of how the parties characterize them. The judgment reinforces the principle that creditors cannot obtain security for previously unsecured debts when the debtor's insolvency is imminent, and that such dispositions made within six months of liquidation will be set aside if they prefer one creditor above others and are not made in the ordinary course of business. The case also clarifies that a bank holding bills as security does not have the automatic right to negotiate them without the pledgor's consent, and that such liquidation during a period of impending insolvency will be scrutinized closely by the courts.