Exchange control approval and the enforceability of foreign security in Zimbabwe

By Mazvita Colleen Nyabereka and Fungai Chimwamurombe

Zimbabwe’s Exchange Control regime currently presents a regulatory hurdle for foreign investment.
Despite the liberalization of the Foreign Exchange market, Sections 11 and 12 of the Exchange Control Regulations, 1996 (S.I. 109 of 1996) (“The Regulations”) render security documents granted to non-residents including share pledges, cessions, and guarantees unenforceable absent prior Reserve Bank of Zimbabwe approval.
This article examines the legislative framework, and the conflicting Supreme Court and High Court jurisprudence in Barker and Levi.Any foreign lender taking security over assets of a Zimbabwean resident must satisfy two distinct forms of perfection, the first being common law perfection (registration of mortgage bond, pledge etc) and the second being exchange control perfection (Exchange Control Authority approval).
Failure to obtain the latter does not merely affect remittance of proceeds outside Zimbabwe; it goes to the root of validity of the security. Section 11(1) of the Regulations provide that, “unless otherwise authorised by an exchange control authority, no Zimbabwean resident shall make any payment outside Zimbabwe; or incur any obligation to make a payment outside Zimbabwe”.
This is couched in mandatory and prohibitory language. The courts have held the phrase “unless otherwise authorised” establishes prior approval as a condition precedent.
The section identifies two distinct acts, the actual payment/remittance outside the country and the preceding act of incurring the foreign obligation to pay. The prohibition does not apply where the act is done by an individual (not a company) who holds free funds at the time, that is to say funds in a Foreign Currency Account (FCA) lawfully held.
The exception therefore does not apply to a Zimbabwean company, and applies only to individuals.
An Application to the Exchange Control Authority must be done through an Authorized Dealer, and must state amount, purpose, duration, and attaching the underlying agreement.Section 12 goes on to provide that “Subject to Section 17, unless otherwise authorized by an exchange control authority, no person shall issue to a foreign resident or nominee of a foreign resident any security which is registered in Zimbabwe”.
Definition of security as provided for in the Regulations includes shares, stocks, bonds, debentures, debenture stock, as well as treasury Bills.
This means that no Zimbabwean can issue shares in a company to a foreigner without approval from Exchange Control Authority. However, Section 45 provides that in proceedings for recovery of a debt, a debtor may not avoid payment solely on the ground that exchange control approval has not been obtained.
This does not validate an illegal contract; it merely prevents a debtor from using exchange control as a technical escape.In the case of Barker v African Homesteads Touring and Safaris (Pvt) Ltd & Anor 2003 (2) ZLR 58 (S), the Supreme Court held that as the alleged agreement to pay the sum to Barker in Australia had not been authorized by the Exchange Control Authority, the agreement was illegal and unenforceable. The contract was void ab initio, and as such, no rights flow from it. Security based on it is equally void. However, the Court in the case of Levi v Magaya HH 621-23 took an equitable approach, a Zimbabwean resident solicited US$3 million from foreign investor offshore, received funds, then sought to avoid repayment by pleading lack of exchange control approval. The Court held that the following, “In casu, the defendant solicited the foreign investment, received the full benefit US$3,000,000.00 in foreign an currency, and now seeks to retain this windfall by crying ‘illegality.’
In my view this becomes a classic case of a party seeking to use a statute as an engine of fraud, a position the courts will not countenance.” The Court relied on Hattingh & Ors v Van Kleek 1997 (2) ZLR 240 (S) at 245E, where it was held “Where a contract is on the face of it legal but, by reason of a circumstance known to one party only, is forbidden by statute, it may not be declared illegal so as to debar the innocent person from relief; for to deprive the innocent person of his rights would be to injure the innocent, benefit the guilty and put a premium on deceit.”
The Court held that Exchange Control Regulations are meant to regulate unauthorized externalization, not to provide a convenient escape for debtors who received benefit. It allowed the claim on basis of unjust enrichment and relaxation of the in pari delicto rule.In conclusion, the above judgments present a conflicting position in the courts, thereby creating uncertainty.
However a reconciliation on the facts could be interpreted to mean that in a scenario where the foreign lender has NOT yet disbursed funds, the principle in Barker applies and the contract is void and unenforceable.
However, If foreign lender HAS disbursed and resident has benefited, the principle in Levi applies, the resident cannot rely on his own wrong to escape liability, and the foreign lender can enforce performance through the courts.
For foreign investors, the lesson is clear, exchange control approval is not a post-closing housekeeping action point, it is a condition precedent to validity.
Eventual payment outside Zimbabwe requires Exchange Control approval, and without it the security is unenforceable.