Mutsa Denhere and Demmusk Enterprises (Pvt) Limited v Faensa Frisco Limited

The second applicant entered into a loan agreement with the respondent (a Mauritius-registered entity) for US$45,000 in November 2010. The funds were disbursed from Mauritius to the second applicant's Standard Chartered bank account in Zimbabwe. The applicants made partial payment of US$2,000 via telegraphic transfer to the respondent's Mauritius bank account in June 2012 but subsequently defaulted. The respondent obtained judgment against the applicants in HC 8844/12 based on a deed of settlement for US$43,065.00 plus penalty interest. During execution proceedings, the Sheriff issued a writ in Zimbabwean dollars and the applicants' legal practitioners paid ZW$50,878.00. The respondent insisted on payment in United States Dollars. The applicants challenged the loan agreement as null and void for lack of exchange control approval, and alternatively sought a declaration that the ZW$ payment constituted full and final settlement. At the hearing, the applicants abandoned the main relief and pursued only the alternative relief.

• Whether the loan agreement constituted a foreign obligation denominated in foreign currency within the meaning of s 44C(2)(b) of the Reserve Bank Act as read with SI 33/19
• Whether payment in Zimbabwean dollars at the rate of ZW$50,878.00 discharged the debt expressed in United States Dollars
• Whether the applicants were entitled to a declaratory order that the ZW$ payment constituted full and final settlement
• Whether exchange control approval was required for the loan agreement to be valid

The application was dismissed with costs.

A loan constitutes a "foreign obligation denominated in foreign currency" within the meaning of s 44C(2)(b) of the Reserve Bank Act (as amended by SI 33/19) where the totality of the factual circumstances and material substance of the transaction demonstrate that it is offshore funding, including where: (1) the lender is a foreign-registered entity; (2) the source of the funds advanced is from a foreign bank account; (3) the loan agreement provides for repayment to a foreign bank account; (4) the parties' conduct (including actual payments made) is consistent with a foreign obligation; and (5) the contractual terms contemplate currency fluctuations and protect the foreign lender. Such foreign obligations are exempt from deemed conversion to RTGS/ZW$ at parity and must be repaid in the original foreign currency. The fact that the loan agreement was executed in Zimbabwe, the borrower is Zimbabwean, or the funds were used in Zimbabwe does not convert a foreign obligation into a domestic one where the source of funds is foreign. Payment in local currency does not discharge a debt properly characterized as a foreign obligation payable in foreign currency.

The court observed that offshore funding presents a lifeline for most businesses in Zimbabwe that cannot obtain adequate funding on the domestic market. The court noted the inconsistency in the applicants' position in accepting US$45,000 from the respondent but then accusing the respondent of not being an authorized dealer and seeking to discharge the debt in devalued local currency. The court commented that allowing payment in RTGS dollars contrary to s 44C(2)(b) would defeat the purpose of ensuring that businesses benefit from offshore funding lines of credit and would be detrimental to the national interest. The court also observed that the applicants placed irrelevant allegations of money laundering before the court after having benefited from the loan.

This case contributes to the body of Zimbabwean jurisprudence interpreting SI 33/19 and s 44C(2)(b) of the Reserve Bank Act regarding the distinction between domestic and foreign obligations following Zimbabwe's currency reforms. It clarifies the test for determining whether a loan constitutes a "foreign obligation" exempt from conversion to RTGS/ZW$ at parity, emphasizing that the determination must be based on the totality of factual circumstances and the material substance of the transaction, particularly the source of funds. The judgment reinforces the policy objective of protecting offshore funding arrangements which are crucial for businesses unable to access adequate domestic financing, and confirms that such obligations must be repaid in the original foreign currency to maintain Zimbabwe's access to international credit lines.