Zimbabwe victims of SA’s banking woes in novel relief bid

22 February 2019 · Carmel Rickard

SA’s corruption woes are casting long shadows across the whole region. Highly improper decisions to “invest” in two discredited SA financial outfits, VBS Mutual Bank and Mamepe Capital, have led to the demise of a Namibian bank intended to provide banking facilities for Namibia’s small businesses and disadvantaged communities. The insolvency of the bank has in turn hit its two minorities shareholders, both from Zimbabwe. Lawyers for the Zimbabwe shareholders have tried, unsuccessfully, to persuade Namibia’s highest court not to wind up the bank. They took a novel line, saying the Namibian constitution required the courts to adopt a different view on what should have happened when the bank was identified as insolvent. The judges should have been tougher on procedural shortcomings in the light of the constitutional aims of empowering disadvantaged communities, and should not have approved the winding-up application. First the high court and now the supreme court as well, have rejected this argument, saying Namibia was based on the rule of law, and the central bank was bound by law to act as it did to protect the country’s financial stability and the hard-earned savings of people and enterprises.

* This article first appeared in Legalbrief

Read the judgment here

No-one doubts that Namibia’s Small and Medium Enterprise Bank was insolvent when the high court granted a winding up order in November 2017. But despite this undisputed insolvency, the SME Bank’s stricken Zimbabwean minority shareholders wanted the courts to have taken a different approach to granting a winding-up order.

The argument was quite breath-taking. The SME Bank was set up to provide banking to small businesses and disadvantaged communities, they said. Since the constitution and foundational principles of state policy committed the country to supporting the previously disadvantaged, the courts ought to have viewed certain procedural short-comings in the way the winding-up application was made, through this constitutional lens, and should have thus refused to grant the application against the bank.

But that argument failed in the high court and, with its decision last week, the supreme court has now also rejected – with costs – the idea that the court ought to have been influenced by “constitutional principles” not to have granted the winding-up order when and how it did.

The original high court application for SME Bank’s winding up was brought by the Bank of Namibia, the country’s central bank and regulator of the banking sector, and its impact was felt most strongly by SME Bank’s three shareholders: the government of Namibia (65 percent) and two Zimbabwean entities who held the rest of the shares.

The central bank showed that SME Bank was “commercially and factually insolvent” and unable to honour its commitment to investors and creditors. The court heard that during August 2016, SME’s external auditors raised concerns about investments of R196m by the bank with SA entity, Mamepe Capital and apparently, through Mamepe, with VBS. The investment was way over the approval limit of SME Bank’s CEO and should have been cleared by the board, though this had not happened.

By mid-December 2016, no proper confirmation could be established to these investments. According to the central bank’s calculations, if the investments were lost – as seemed likely – the SME Bank was insolvent, yet the management and board of SME Bank was “entirely unable” to give satisfactory answers about the situation.

The Bank of Namibia then required the SME Bank’s shareholders to raise further capital so that the bank could be restored to solvency, but the Namibian government as majority shareholder declined to recapitalize the bank, while the minority shareholders did not come up with a clear plan, let alone funds.

During the winding-up application the minority shareholders denied that the Mamepe and VBS investments were unsound, but did not produce any factual material about the investments. And when the matter was finally argued, they based their opposition to winding-up on ultimately unsuccessful constitutional arguments together with procedural points.

They said it was Namibian state policy for government to act in a way that raised the standard of living of the disadvantaged. These policy principles should inform the way the law was interpreted, including the way the court had viewed procedural shortcomings in the prelude to the winding-up application. The shortcomings should have been treated in a way that recognised the constitutional principles of helping the disadvantaged, and other remedies ought to have been tried before the bank was wound up.

In their decision the supreme court judges said that principles of state policy did not arise in interpreting the Banking Institutions Act since it was “not based upon those principles”. Apart from not applying to the situation, they said, the state policy principles cited by counsel would in any event have pointed in the direction of bank supervision in order to protect the hard-earned savings of people and businesses.

They added that the Namibian state was founded on the rule of law which, in turn, required the central bank to carry out its legal duties.

The central bank acted quite properly in applying for winding up, particularly after the government as majority shareholder, “understandably” refused to recapitalize the SME bank, given what the court described as “at the least serious mismanagement and possibly worse and a comprehensive failure of corporate governance on the part of SME Bank.”

Examining in minute detail the procedural problems raised by the majority shareholders, the judges found they could not stand in the way of a winding up order. The high court had awarded costs against the minority shareholders because the arguments raised were merely technical. In the supreme court the same “procedural point-taking” had continued, with no issues of substance raised. The judges said this point-taking was “without merit … merely served to delay the inevitable,” and did not amount to a good faith opposition to the winding up. Costs should thus be awarded against the minority shareholders in the supreme court as well.

Carmel Rickard

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