The Liquidator of Afrasia Bank Zimbabwe Limited v Zimbabwe School Examinations Council and Chief Registrar of Deeds N.O

In May 2014, the first respondent (Zimbabwe School Examinations Council - ZIMSEC) made three fixed deposit investments totaling US$1.5 million with Afrasia Bank Zimbabwe Limited (the applicant). The investments matured on 29 August 2014 with a combined maturity value of US$1,666,388.89. The applicant bank failed to pay on the maturity date, citing liquidity challenges. On 29 October 2014, the applicant offered a repayment plan and proposed to secure the debt by mortgaging two of its immovable properties in Avondale, Harare, and involving a third party (Molgam Enterprises) to provide additional security via a caveat on its Greystone Park property. On 5 November 2014, MTSHIYA J granted default judgment in favor of the first respondent for the full amount plus interest. On 20 November 2014, mortgage bonds were registered over the applicant's properties as security. The applicant bank subsequently went into liquidation on 23 February 2015 after its holding company withdrew its investment and the bank surrendered its banking license. The liquidator now sought to impeach the mortgage bond transactions as voidable preferences under section 42(2) of the Insolvency Act.

• Whether the registration of mortgage bonds in favor of the first respondent constituted a voidable preference under section 42(2) of the Insolvency Act [Chapter 6:04]
• Whether the applicant proved that immediately after making the dispositions, its liabilities exceeded its assets
• Whether the dispositions were made within six months of the applicant's liquidation
• Whether the first respondent could prove that the dispositions were made in the ordinary course of business without intention to prefer it above other creditors under section 42(3)

Application dismissed with costs.

To successfully impeach a disposition as a voidable preference under section 42(2) of the Insolvency Act, the liquidator must prove with credible, specific evidence that immediately after the disposition was made, the debtor's liabilities exceeded its assets, fairly valued. The requirement that liabilities exceed assets "immediately after" the disposition is strict and temporal - evidence of insolvency at a later date is insufficient. Where a liquidator fails to establish this fundamental requirement, the burden does not shift to the creditor to prove the exception under section 42(3). Furthermore, a disposition cannot constitute a voidable preference where there are no identified competing creditors, as the concept of "preference" necessarily implies a choice between creditors. Transactions conducted in accordance with ordinary business practice in the relevant industry, particularly where the creditor has no knowledge of the debtor's financial difficulties, will generally fall within the ordinary course of business exception.

The court made several observations about the nature of the evidence required to prove insolvency for purposes of section 42. MUSHORE J noted that "fairly valued" in this context means equitably, objectively, and honestly assessed, and "immediately" means instantly, at once, or directly - not at some indefinite future time. The court also observed that registering mortgage bonds and surety deeds is normal practice for any prudent bank and forms part of the ordinary flow of banking business to guarantee returns on investments. The court noted that the applicant's own correspondence undermined its case by demonstrating that the security arrangements were interim measures pending property sales, rather than an attempt to prefer one creditor over others. The court further commented that the applicant went to some length to assure both its lawyers and the first respondent that it could meet its obligations, giving no hint of financial difficulties.

This case clarifies the evidentiary burden on liquidators seeking to impeach transactions as voidable preferences under section 42 of the Insolvency Act. It emphasizes that: (1) liquidators must provide concrete, dated evidence showing that liabilities exceeded assets immediately after the impugned disposition, not merely general evidence of liquidity challenges; (2) the timing requirement is strict - insolvency must be proven as at the date of the disposition, not at some later date; (3) transactions undertaken in accordance with normal business practice in the relevant industry (in this case, banking security arrangements) will generally fall within the "ordinary course of business" exception; and (4) the liquidator must identify competing creditors to establish the element of "preference." The case demonstrates the difficulty of impeaching security arrangements where the creditor acted in good faith and without knowledge of the debtor's financial difficulties.