Palehouse Investments (Pvt) Ltd v Hwange Colliery Company Limited and Dale Sibanda N.O.

The applicant hired earth-moving equipment to the first respondent in August 2017 under an equipment hire agreement. The first respondent was required to pay US$225,230.00 in mobilisation costs and a deposit of US$352,000.00 plus 50% of the first month's rental (US$176,000.00). The first respondent terminated the agreement on 31 January 2018, citing breach by the applicant due to defective equipment that failed to meet production targets and the 85% availability requirement. The applicant contends the termination was unlawful as it did not comply with clause 18.1 requiring 14 days' notice to remedy any breach. The first respondent was subsequently placed under reconstruction in terms of the Reconstruction of State Indebted Insolvent Companies Act, and the second respondent was appointed as administrator. On 26 March 2021, the applicant sought leave from the second respondent to sue the first respondent for unpaid mobilisation costs and damages for unlawful termination. The second respondent denied leave on 29 March 2021, stating the applicant had been overpaid, had no genuine cause of action, and was acting in bad faith with "dirty hands".

• Whether the second respondent's decision to deny leave to sue was grossly unreasonable, unfair, or biased in violation of section 3 of the Administrative Justice Act
• Whether the applicant established a prima facie cause of action justifying leave to sue a company under reconstruction
• Whether the decision to deny leave complied with the requirements of administrative fairness and reasonableness
• The correct interpretation and application of section 6(b) of the Reconstruction of State Indebted Insolvent Companies Act regarding leave to sue

1. The second respondent's decision of 29 March 2021 denying the applicant leave to sue the first respondent was set aside. 2. The applicant was granted leave in terms of section 6(b) of the Reconstruction of State Indebted Insolvent Companies Act to institute proceedings against the first respondent for damages for breach of contract and unpaid mobilisation costs. 3. Each party to bear its own costs of suit.

An administrator appointed under the Reconstruction of State Indebted Insolvent Companies Act must exercise the discretion to grant or refuse leave to sue in terms of section 6(b) in accordance with the principles of administrative justice under section 3 of the Administrative Justice Act - namely, acting lawfully, reasonably and in a fair manner. A decision to refuse leave to sue must be supported by cogent, evidence-based reasons. Where there are genuine disputes of fact regarding contractual obligations and their performance, and where the administrator's decision is based on unsubstantiated assertions (such as overpayment without proof) and contradictory reasoning, the decision is grossly unreasonable and subject to review and setting aside under section 4(2) of the Administrative Justice Act. At the stage of considering whether to grant leave to sue, the administrator should not make final determinations on the merits of the claim - the existence of an arguable case is sufficient to warrant granting leave, with the merits to be determined in subsequent proceedings.

The court observed that a reconstruction order places administrators in an invidious position, as they are expected to be a judge in their own cause and make determinations in matters in which they have a vested interest. The court noted, citing Gurta AG v Gwarazimba N.O., that applicants are entitled to their day in court, and "whether the case is well founded or not is neither here nor there as civilisation dictates that the litigant must be allowed to bring a civil action to protect its right. To deny a party that opportunity would be to expose the party to the impulses of a rudimentary soul, to resort to his hand in order to achieve justice." The court also commented that as a general rule, an entity under debt reconstruction cannot be sued to afford it an opportunity to become viable again, but this does not mean leave should be arbitrarily refused where there is a genuine dispute. The court declined to award costs on an attorney-client scale as requested, noting no sufficient justification was provided, and instead ordered each party to bear its own costs.

This case clarifies the standards of reasonableness and fairness required of administrators under the Reconstruction of State Indebted Insolvent Companies Act when exercising the power to grant or refuse leave to sue. It establishes that while protection of companies under reconstruction is important, administrators must exercise their discretion lawfully and reasonably, providing evidence-based reasons for their decisions. The judgment reinforces that decisions of administrators are subject to administrative law principles under the Administrative Justice Act, including the requirements of lawfulness, reasonableness and fairness. It also affirms the principle that parties are entitled to their day in court, and the question of whether a claim has merit is a matter for determination at trial, not at the stage of seeking leave to sue. The case demonstrates that administrators occupy an invidious position as they must judge matters in which they have a vested interest, making judicial oversight particularly important.