BSR: Supreme Court judgement completes the grand heist
The Supreme Court judgement in the case of Zambezi Gas Zimbabwe (Private) Limited v N.R. Barber (Private) Limited and another SC3/20 represents a judicial confirmation of the grand heist that took place in February 2019 when the government issued a decree regarding the conversion of the US Dollar to the RTGS dollar at the command rate of one-to-one.
Statutory Instrument 33 of 2019 (SI 33/2019) was issued in terms of the Presidential Powers (Temporary Measures) Act, the controversial statute which permits the president to issue decrees. Its major purpose was to provide for the recognition of the RTGS dollar as legal tender (although it was already in use). It also provided for the command conversion of the US dollar-denominated assets and liabilities at the fixed rate of one-to-one. This is a fiction that the government had maintained since 2016.
A windfall and a calamity
The decree was a windfall for debtors whose debts were denominated in US dollars. At the stroke of the presidential pen, their debts had been significantly reduced in US dollar terms because contrary to the government’s command rate, the RTGS was weaker than the US dollar. For the creditors, however, it was a total nightmare. This is because of one of the provisions of SI 33/2019 which provided that “for accounting and other purposes” all assets and liabilities which were “valued and expressed” in US dollars immediately before its effective date would be “deemed to be values in RTGS dollars at a rate of one-to-one to the United States dollar”.
So if the debtor owed US$1 million on 21 February 2019, on 23 February 2019, just two days later, they owed just RTGS$1 million. But in the real world, RTGS$1 million was obviously significantly weaker than US$1 million. All because the government said so, via a draconian decree. This is the essence of a command and control approach governance which is the hallmark of the Zimbabwean regime. While it was a boon for debtors, it represented a devastating blow to creditors.
Fighting over debts
The ramifications of the government’s decree were felt across the economic landscape and predictably, the drama was soon being played out before judges in the courts of law. This is because debtors suddenly found the energy to pay up their debts – by simply converting their US dollar-denominated debts to RTGS dollar debts at the rate of one-to-one, effectively profiting at the expense of their creditors.
Both creditors and debtors approached the courts for relief, debtors insisting on their right to convert US dollar-denominated debts at the rate of one to one and creditors protesting that this was improper and arguing that debtors should honour their contractual obligations in US dollars. One of these cases reached the Supreme Court, which delivered its judgement on 20 January 2020. It is a heavy blow to anyone who was owed US dollar debts and obligations on 22 February 2019 and confirms the windfall for debtors.
For the economy, confirmation of the legality of the decree is a traumatic assault on business confidence as it erodes the right to private property and shatters the sanctity of contracts. It makes a mockery of Zimbabwe’s claim of advances in Ease of Doing Business. Let's take a quick look at the facts of the case.
The Zambezi Gas case
The facts of the matter in the Zambezi case are very simple. In June 2018, N.R. Barber Pvt Ltd (Barber) won a lawsuit against Zambezi Gas Zimbabwe Pvt Ltd for US$3,885,000.00, a debt which has arisen for services rendered. There was an additional charge of interest and legal costs. Zambezi’s appeal against the judgement was thrown out in May 2019. A week later, Zambezi deposited RTGS$4,136,806.54 as a settlement of the debt. Barber protested that the amount was far less than what Zambezi Gas had been ordered by the court. It stated that the amount paid was only equivalent (at the prevailing Interbank market rate) to US$144,788.23 (out of the US$3,992,018.31, which it was expecting).
Zambezi Gas insisted that it had complied with the law. After all, it argued, SI 33/2019 allowed the conversion of all US dollar-denominated local assets and liabilities at the government-decreed rate of one-to-one. Barber instructed the Sheriff of the High Court to attach Zambezi Gas’ property to settle the difference. That is when Zambezi Gas went to the High Court pleading for a stay of execution and a declaration that the payment it had tendered in RTGS dollars was a full and final settlement of the judgement debt.
The High Court dismissed Zambezi Gas’s application. Zambezi Gas then appealed to the Supreme Court. It is this Supreme Court judgement that has sent shock-waves in the markets. In effect, however, the Supreme Court has merely confirmed the ill-conceived and highly destructive step taken by the Minister of Finance, Mthuli Ncube last February. The consequences, however, are noxious.
The Supreme Court agreed with Zambezi Gas that SI 33/2019 permitted it to convert the US dollar-denominated judgement debt at the government decreed rate of one-to-one. The Chief Justice Luke Malaba rejected the High Court judge’s reasoning that SI 33/2019 did not include judgement debts in its ambit. As long as the liabilities were expressed in US dollars, the Chief Justice stated, the provision applied.
Interestingly, because of SI 33/2019’s express mention of US dollars, the Chief Justice was prepared to concede that it would not have applied if the liability was expressed in another foreign currency other than the US dollar. This suggests that liabilities expressed in South African Rands or another currency would have been safer than liabilities expressed in US dollars. This is an example of the absurdities that can result from a rigid and pedantic insistence on a literal interpretation of statutes, which takes no account of context. If the Supreme Court is right, the discrimination between US dollar creditors and creditors owed in other foreign currencies is irrational and unfairly discriminatory, itself a potential ground for unconstitutionality of the provision.
Also, if the Supreme Court is right, it shows poor legislative drafting or, at worst, the inconsistency of government in policy-making. Was it the intention of the government to affect only those who were owed US dollar balances? If so, what would be the basis for not affecting those who were owed debts in other foreign currencies?
The implications of this judgement could not be more devastating for the many who find themselves in the same situation as Barber. It is worse for creditors who were owed US dollar balances and have not yet been paid because the exchange rate has tumbled greatly since February 2019. The Zimbabwe dollar has on average been trading at one-to-sixteen on the Interbank Market and over 20 on the parallel market. Those poor creditors will be getting RTGS dollars that are far weaker than they were in February 2019.
The problem, of course, lies with the government which issued this decree. Law, and in particular the interpretation of statutes, is not an exact science. Courts can only work with the laws that are on the statute books and bad laws tend to produce bad outcomes. It is hard to see the justice of permitting debtors in Zambezi Gas’ position who, having failed to pay their debts, and having been sued for it, suddenly find themselves on much higher ground than their creditors. Having enjoyed services worth US$3,9 million, Zambezi Gas only had to pay $144,000, a mere pittance in the circumstances. It’s a huge loss to the creditor and a massive gain for the debtor. The creditor says this violates the sanctity of contracts. The debtor replies that it’s vis major (an Act of God). In reality, it’s a hare-brained government decree that does significant harm to the economic environment.
Erosion of private property
Clearly, these figures represent a significant loss of property for the creditor and all others in its position. However, it is Chief Justice Malaba’s comments on the effect of conversion which are quite astounding. Barber’s lawyers advanced a plea for consideration of parity, arguing that “the conversion of foreign currency denomination amounts to a lesser value in the local currency”. It’s worth quoting the judge’s full statement:
“There can be no parity to talk about once it is accepted that the RTGS dollar is a currency denomination with a set legal value. It is the legal tender in Zimbabwe and as such carries a specific value. Once a conversion of the value of an asset or liability denominated in United States dollars is made to the value of RTGS dollars, the converted value remains the same, as the two different currency denominations both carry value. No exchange rate can be applied as the judgment debt remains a judgment debt with a value after it is converted to the local currency. The RTGS dollar has the value given under the one-to-one rate and it remains on that value even after the effective date”
It is hard to make sense of this reasoning when one considers what has happened to the RTGS dollar since SI 33.2019 was issued in February 2019. How can it be said that “the RTGS dollar has the value given under the one-to-one rate and it remains on that value even after the effective date” when it is trading at around one-to-sixteen to the US dollar on the day that the judge was delivering his judgement? Is the ivory tower of justice so divorced from the economic realities so as to produce such esoteric comments from the country’s leading justice?
Perhaps the judge wanted to say something that his words did not express with sufficient coherence and clarity. Missing completely from this is the fact that the chief problem with SI 33/2019 was the command rate of one-to-one which it imposed. It was unrealistic then and it is even more absurd now. This, of course, is the government doing but the Chief Justice had no business trying to justify the unjustifiable. It’s shocking that there was no dissenting opinion.
One thing for sure though is that this judgement brings to the fore the hazardous nature of the Zimbabwean economic terrain for those engaged in trade and commerce. Just a simple decree can have devastating consequences. For perspective, there are many more in Barber’s situation who are now counting their losses in the wake of the Supreme Court judgment confirming the patently unjust effects of last year’s decree. They include commercial entities and individuals who were owed US dollar debts and obligations before 22 February 2019. Now they must settle for payment in RTGS dollars converted at a rate of one-to-one when it fact the Interbank and parallel market rates are nowhere near that.
To visualize the scale of the injustice, consider a person who was owed US$100 in January 2019. She will now get RTGS$100. If she changed US$100 at the Interbank market rate she would be getting RTGS$1600. That’s a loss of RTGS$1500. The Supreme Court says it’s what the law allows.
A reduction in an asset from US$3,9 million to US$144,000 is, by all accounts, a serious erosion of violation of one’s private property rights. There is, one might imagine, a good case for challenging the constitutionality of SI 33/2019 (and the subsequent Finance Act No. 2, which replaced and confirmed it in August 2019). Yet, in view of the reasoning given by the Chief Justice, such an application is unlikely to succeed. The comments suggesting that there is no loss of value suggest a foreclosure of any arguments that there is erosion of private property right.
As the biggest domestic debtor, the biggest beneficiary in all this is the government itself. All its domestic debts which were denominated in US dollars cannot now be challenged, now that the Supreme Court has spoken. All those who are owed by the government must count their losses.
In effect, SI 33/2019 allowed the government to reduce its domestic debt by theft and the Supreme Court has just confirmed it. Yet in doing so, the government has made itself a hard sell. Creditors will be very cautious and wary the next time it comes asking for credit.
Lawyers operating in an authoritarian environment must find more ingenious ways of protecting the value of their clients’ property in any contractual arrangements. Those who have gained may find comfort in their windfall, but any comfort that comes from authoritarian decrees is false and misleading comfort.
For the rest of the people whose losses have been confirmed, it's yet another sobering lesson that salvation from authoritarian rule is not to be found in the courts of law; instead, it is in their hands.