SAIPAR Case Review
Volume 4 Article 13
Issue 2 November 2021
11-2021
Chimanga Changa Limited v. Export Trading Limited CAZ Appeal
No. 76/2020 and CAZ Appeal No. 053/2021
Chanda Chungu
University of Zambia
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Recommended Citation
Chungu, Chanda (2021) "Chimanga Changa Limited v. Export Trading Limited CAZ Appeal No. 76/2020
and CAZ Appeal No. 053/2021," SAIPAR Case Review: Vol. 4: Iss. 2, Article 13.
Available at: https://scholarship.law.cornell.edu/scr/vol4/iss2/13
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Chimanga Changa Limited v. Export Trading Limited CAZ Appeal No. 76/2020 and CAZ
Appeal No. 053/2021
Chanda Chungu 1
Facts
The Court of Appeal delivered two judgments with respect two separate Rulings delivered by
the Commercial Division of the High Court of Zambia. The facts that led to the Rulings
stemmed from a judgment rendered against Chimanga Changa Limited whereby the
Commercial Division of the High Court of Zambia awarded Export Trading Limited a sum of
money relating to unpaid goods supplied. Thereafter, Chimanga Changa failed to pay the
judgment sum and entered business rescue proceedings.
The first Ruling dealt with a preliminary objection raised by Chimanga Changa Limited with
respect to the need for leave or permission from the business rescue administrator/practitioner
or the court to challenge the legality of the institution of business rescue proceedings. The
second Ruling related to the decision of the Commercial Division of the High Court of Zambia
to set aside the resolution of the Export Trading Limited to commence business rescue
proceedings and discharge the appointment of the business rescue practitioner.
Holding
Both cases guided that that financial distress and reasonable prospect of rescuing it are the key
factors to consider before passing a resolution to place a company under Business Rescue.
In the first Judgment, the Court of Appeal held that
Our understanding of this section is that there are no Business Rescue Proceedings until
the procedure under section 43(1) has been completed.
Based on the above, the court was of the view that business rescue proceedings commence
when the procedure in section 43 relating to consideration and approval of the business rescue
plan has concluded.
In the second Judgment, the Court of Appeal gave an overview of the purpose of business
rescue by emphasising that the company must be in financial distress and prove that there are
reasonable prospects of rescue. The Court of Appeal guided that a company under business
rescue must provide the relevant information to enable the court to be satisfied that once placed
under business rescue, the company would be maintained as a going concern, or the objects of
the proceedings will be achieved. In other words, the Court of Appeal outlined that where there
is an objection to the business rescue proceedings by an affected person, the company in
business rescue must provide sufficient information that the company is not only financially
distressed, but also that there are reasonable prospects of recovery.
In the circumstances of the second Judgment, the court held that Chimanga Changa did not
provide cogent evidence that there would be reasonable prospects of success and thus the
objection to the proceedings by the Export Trading Limited succeeded.
1
LLB, LLM (Cape Town), MSc (Oxford), lecturer in law at the University of Zambia
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Significance
The Corporate Insolvency Act in Part III introduces the concept of business rescue. The Act
introduces and nurtures an entirely new business rescue process, the purpose of which is to
facilitate the rehabilitation or reorganisation of a company that is in financial distress. It is now
widely accepted that business rescue offers a very useful alternative to the liquidation or
winding up of a company. For these reasons, the two Judgments of the Court of Appeal are
crucial in giving interpretation to the provisions of the Corporate Insolvency Act and the
business rescue proceedings which are new to Zambia.
Business rescue proceedings have been defined in section 3 of the Corporate Insolvency Act
as:
means the process of facilitating the rehabilitation of a company that is
financially distressed by providing for —
(a) the temporary supervision of the company and management of its affairs,
business and property;
(b) a temporary moratorium on the rights of claimants against the company or
in respect of property in its possession; or
(c) the development and implementation, if approved in accordance with this
Act, of a plan to rescue the company by restructuring its affairs, business,
property, debt and other liabilities and equity in a manner that maximises
the likelihood of the company continuing in existence on a solvent basis or,
if it is not possible for the company to so continue in existence, results in a
better return for the company’s creditors or shareholders than would result
if the company was to be liquidated; …
The above definition indicates that business rescue proceedings entail saving the company that
is in financial distress as a going concern or if this is not possible, then as an alternative or
secondary object, to restructure the company to produce a return for the company’s creditors
or shareholders that is better than the return that would have resulted from the immediate
liquidation of the company. The secondary object imposes a less onerous duty on the business
rescue administrator than the primary object of saving the company as a going concern.
Business rescue proceedings are therefore intended to help rehabilitate company that is
financially distressed, only where there appears to be a reasonable prospect of rescuing the
company that is in financial distress and has prospects of recovering. As the Court of Appeal
in the first Judgment delivered by Siavwapa JA stated:
The starting point is that there must be evidence that the Company is in financial distress
which, if not resolved, would result in defaulting on its debts and ultimately lead to
insolvency. It must however, also be shown that the Company can be rescued from its
financial malaise if specific measures are put in place and become profitable again.
Business Rescue also has the objective to offer the best benefits to all its creditors
regardless of status.
The business rescue process is intended to maintain the company as a going concern or achieve
a better outcome for the company’s creditors who lent money to the financially distressed
entity. The broad objective of business rescue proceedings is to assist the company in financial
distress recover and help manage its debts. Business rescue essentially seeks to provide a
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flexible and effective process of extending the lifespan of companies by providing efficient
rescue and recovery processes and mechanisms of financially distressed companies in a manner
that balances the rights and interests of all relevant stakeholders.
In the second Judgment of the Court of Appeal which was delivered by Chishimba JA guided
that:
In a nutshell, one of the purposes of the BRP is to provide for the efficient rescue and
recovery of financially distressed companies in a manner that balances the rights and
interest of all relevant stakeholders. The idea is to restore a company to profitability
and avoid liquidation.
The Court of Appeal thus emphasised the crucial point that the business proceedings are
specifically designed specifically to turn around the financial affairs of a company. It is for this
reason that these proceedings must be instituted before liquidation proceedings and even have
the potential to halt liquidation proceedings. It follows that these proceedings must not be a
terminal procedure for the company but rather help the company ‘bounce back’ or recover into
a financially stable entity.
Business rescue proceedings are not intended to be abused by companies to avoiding their
liabilities but intended to assist a company in financial distress that has reasonable prospects
of recovering. As business rescue has the effect of a moratorium on the legal proceedings
against the company, any affected person such as a creditor has the right by virtue of section
22 of the Corporate Insolvency Act to challenge the business rescue proceedings.
Section 22(1) of the Corporate Insolvency Act provides as follows:
(1) Subject to subsection (2), at any time after the adoption of a resolution as specified
in section 21 and until the adoption of a business rescue plan in accordance with section
43, an affected person may apply to a Court for an order—
(a) setting aside the resolution on the grounds that—
(i) there is no reasonable basis for believing that the company is
financially distressed;
(ii) there is no reasonable prospect for rescuing the company; or
(iii) the company has failed to satisfy the procedural requirements set
out in section 21;
(b) setting aside the appointment of the business rescue administrator, on the grounds
that the business rescue administrator—
(i) is not qualified as provided in section 30;
(ii) is not independent of the company or its management; or
(iii) lacks the necessary skills, having regard to the company’s
circumstances; or
(c) requiring the business rescue administrator to provide security in an amount and on
terms and conditions that the Court considers necessary, to secure the interest of the
company and any affected person.
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An affected person may apply to court to set aside a business rescue resolution on one of the
grounds, namely that: the correct procedure was not followed, there is not reasonable basis for
believing the company is financially distressed or there is no prospect of rescuing the
company. 2
In considering such an application, the court may set aside the resolution on any of these
grounds or if it considers that it is otherwise just and equitable to do so. 3
In the circumstances of the Chimanga Changa case, the creditor challenged the business rescue
proceedings on the grounds that there is no reasonable prospect for rescuing the company
which is recognised by section 22(a)(ii) of the Act provided above. It is on this basis that the
Court gave lucid guidance on what would occur in the circumstances. The court emphasised
that once an affected person makes their application, the company in business rescue must file
an Affidavit in Opposition outlining the extent of the financial distress by outlining the
company’s financial position, assets, and liabilities as well as the basis for believing the
company has reasonable prospects of recovery.
The Court of Appeal opined that
The fact that a company is financially distressed and owes several creditors on its own,
is not sufficient reason to place a company under business rescue. It must further be
shown that apart from this financial distress, the company can avoid liquidation if
certain measures are put in place. Those measures need not be in detail, but must be
sufficiently concise to enable the court make an informed decision.
The above holding is significant in that it guided that the business rescue proceedings are
underpinned by two considerations, financial distress, and reasonable prospects of recovery.
The court was clear that proof of both must be provided and form the basis for any decision by
the shareholders to commence business rescue proceedings following a recommendation from
the board of directors who must also be guided by the same considerations.
The first Judgment of the Court of Appeal can be critiqued for stating that business rescue
proceedings only commence when the business rescue plan has been approved. One can
plausibly argue that the holding of the Court of Appeal is not entirely accurate given the
wording of the Corporate Insolvency Act. The correct view should have been that business
rescue proceedings commence when the special resolution is adopted and filed with the
Registrar of Companies as prescribed by section 21 of the Act, contrary to the position taken
by the Court of Appeal.
It is the adoption and subsequent filling of the special resolution that commences business
rescue. The law merely gives an affected person a wider timeframe within which to file their
objection, up until the business rescue plan has been adopted, but this does not mean that
business rescue has not commenced
This is especially clear when regard is had to the provisions of section 25 of the Act which
provides for a moratorium on actions being brought against a company while it is in business
rescue. By implication, if the Court of Appeal’s first decision stands, a company that has passed
2
Section 22(1)(a) of the Corporate Insolvency Act.
3
Section 22(5)(a) of the Corporate Insolvency Act.
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a special resolution and filed it with the Registrar will not be able to benefit from the
moratorium up until the business rescue plan is passed.
The moratorium would be of no use to the company if it only kicks in when the business rescue
plan is adopted, leaving the company open to adverse actions being taken against it in the
interval between the passing of the resolution and the adoption of the business rescue plan.
This would in essence defeat the rationale behind business rescue proceedings, which is to
afford the company breathing space to devise a turnaround plan to resuscitate its business.
The Supreme Court of South Africa held in the case of Panamo Properties (Pty) Ltd and
Another v Nel and Others 4 that during business rescue there is a temporary moratorium on the
rights of claimants against the company and its affairs are restructured through the development
of a business rescue plan aimed at it continuing in operation on a solvent basis or, if that is
unattainable, leading to a better result for the company's creditors and shareholders than would
otherwise be the case.
It was further held in the Panamo Properties case that once a resolution is taken; it only
becomes effective when it is filed with the Companies and Intellectual Property Commission
of South Africa (CIPCSA). This is similar to the provisions in section 21 of the Zambian Act.
As far as the commencement of business rescue proceedings is concerned, the Corporate
Insolvency Act provides for two possibilities: -
• In the case of the initiation of business rescue by a special resolution passed by the
shareholders, business rescue commences the company files the resolution with the
Patents and Companies Registration Agency. But in the event that a previous resolution
has lapsed due to the company’s failure to comply with subsection (3) or (4) of section
21 as outlined above, the business rescue proceedings are deemed to commence when
the company applied to the court to file a further resolution.
• In the case of the initiation of business rescue by court order, when an affected person
applied to the court and the court makes an order placing the company under
supervision un accordance with the Act
This once again underscores the criticism of the Chimanga Changa decision which held that
business rescue commences when the business rescue plan has been considered and approved
in terms of section 43 of the Corporate Insolvency Act. In that case, it was held that
Our understanding of this section is that there are no Business Rescue Proceedings until
the procedure under section 43(1) has been completed. In that regard, an affected person
who moves the Court under section 22 (1) seeks to prevent the company from going
into Business Rescue proceedings by challenging the validity of the Resolution that
seeks to place the company under Business Rescue Proceedings.
The above does not accord with the provision of the Act. Just because an affected person can
challenge the resolution seeking to commence business rescue, does not mean that the company
has not entered business rescue when the resolution is filed and passed. As can be seen from
the legislation itself, business rescue proceedings are initiated in one of two ways: - when the
4
2015 (5) SZ 63 (SCA).
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special resolution of the company is passed and filed with the Registrar of the Company; or
when the court makes an order upon an application by an affected person.
Whereas section 24 of the Corporate Insolvency Act only provides for the commencement of
business rescue in relation to when the court makes an order, it should be noted as discussed
above that business rescue can also commence extra-judicially when the special resolution is
passed and is filed at PACRA. Therefore, contrary to the position in the first Chimanga Changa
judgment the commencement of business rescue is not dependent on the passing of the business
rescue plan.
The above notwithstanding, as the law stands, per the interpretation of the Court of Appeal in
the first Chimanga Changa judgment, is that business rescue proceedings only commence once
the business rescue plan has been approved. This means that a company may only benefit from
the moratorium in section 25 after the business rescue plan has been adopted. It should be noted
that this Judgment is subject of an appeal to the Supreme Court of Zambia.
In relation to the second judgment, the court was at pains to emphasise at various points stated
that the company must show the extent of financial distress and reasonable prospects of
success. The court seemed to suggest at various points that the company seeking to enter
business rescue proceedings must get approval from the court. The Court guided that
It is trite that for the court to grant an order of BRP, it must be satisfied that the company
is or is likely to become viable to pay its debts and that the order, if made, is reasonably
likely to achieve an objective of administration. (emphasis author’s)
From the above the Court of Appeal state that it is the role of the court to grant or approve the
business rescue. However, this is not the position of the law. The court does not grant an order
for business rescue. When the directors of the company make a recommendation to the
shareholders to enter business rescue proceedings and the shareholders subsequently pass a
special resolution, business rescue proceedings commence as soon as the resolution is passed
and filed with the Registrar. The law does not provide for the court to grant an order relating
to the proceedings.
The role of the court only applies where an affected person challenges the decision, i.e. the
special resolution to commence business rescue proceedings. It is only at that point that the
court must hear the objection and evaluate the evidence on record to determine if the business
rescue is a bona fide exercise.
A further criticism of the second judgment is the following pronouncement where they stated
that:
In our view, the applicant ought to have availed information to the court such as plans
for revival aimed at achieving the purpose of BRP. This application for BRP lacked full
disclosure. The appellant should have provided proposed plans to sustain the company.
For instance a bona fide workable restructuring plan and or new capital injection from
other sources. (emphasis author’s)
Once a company enters business rescue, the next step is to identify a business rescue
practitioner who thereafter prepares a business rescue plan for approval. It is submitted that the
above holding defeats the purpose of appointing a business rescue administrator and the
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preparation and approval of a business rescue. When the company decides by way of special
resolution to commence business rescue, the responsibility falls upon a registered business
rescue practitioner to take the necessary steps to assist the company recover from its financial
woes.
For the Court of Appeal to state that the company must avail information on the business rescue
plan and give full disclosure undermines the role of the practitioner who is mandated with these
tasks by the statute. In other words, it is not for the company in financial distress to provide
information on its plans to revive the company. The court should have limited itself to only
require the company to show the basis for its belief that there are reasonable chances of
recovery.
The Court of Appeal failed to consider section 22 (5) of the Corporate Insolvency Act which
provides that:
(5) The Court may, when determining an application made in accordance with
paragraph (a) of subsection (1)—
(a) set aside the resolution—
(i) on any ground set out in that subsection; or
(ii) if, having regard to all of the evidence, the Court determines that it
is otherwise just and equitable to do so; and
(b) afford the business rescue administrator sufficient time to form an opinion
whether—
(i) the company appears to be financially distressed; or
(ii) there is a reasonable prospect of rescuing the company;
and after receiving a report from the business rescue administrator, may set
aside the company’s resolution, if the Court determines that the company is not
financially distressed or there is no reasonable prospect of rescuing the
company. (emphasis author’s)
The above provision is clear that when a court considers an application to set aside the special
resolution, the court must have regard to the grounds laid out by the affected person challenging
the business rescue proceedings and consider the evidence on record to determine if it would
be just and equitable to set aside the resolution. In addition to this, the law is clear that the
business rescue administrator shall be given sufficient time to form an opinion whether the
company is financial distressed or there is reasonable prospect of rescue. Section 22(5) is clear
that the decision to set aside the special resolution of the shareholders shall only be made after
receiving the report from the business rescue practitioner.
However, contrary to the guidance from the law, the Court of Appeal placed the responsibility
of proving that the company is financial distress and have reasonable prospects of success on
the company itself instead of the business rescue practitioner who is tasked with this role on
behalf of the company. As such, the court should have considered the statutory responsibilities
of business rescue administrator who was appointed and refused to set aside the special
resolution in the absence of a report as mandated.
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As the Corporate Insolvency Act, and the business rescue proceedings are new to Zambia, these
cases are crucial. The provide an overview of the purpose of business rescue proceedings and
the elements that must be demonstrated by a company.
As the exercise has dire consequences on creditors based on the moratorium against legal
proceedings, creditors are given the right to challenge the proceedings in court. The second
case outlined what the company must prove and the way they should to satisfy the court that
the business rescue proceedings should proceed. In the absence of such proof, the court is at
liberty to set aside the special resolutions commencing business rescue proceedings which
would permit the creditor or affected person to commence court process against the company.
It should however be noted that the first Judgment is before the Supreme Court of Zambia
where the gaps identified are likely to be clarified. It is hoped that the second Judgment also
goes on appeal to ensure that this area of the law receives adequate guidance from the highest
court in the land.
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