The Zimbabwe government’s 2018 directive to separate local and foreign currency bank balances was unconstitutional and a violation of property rights, a High Court judge has ruled.
In a ruling that sharply criticised the central bank and Treasury, Justice Happias Zhou ruled that Harare architects Stone/Beattie Studio were entitled to the US$142 000 thousand it had deposited with CABS. Conversion of that balance into local RTGS dollars, a result of Exchange Control R120/2018 directive issued by RBZ on 4 October 2018, was a violation of property rights, the judge ruled.
The architects’ account held US$142 000 at the end of October 2016. In response to the introduction of bond notes on November 28, 2016, the architects informed CABS that no further deposits or withdrawals would be made from their account.
Through their lawyers, the architects again wrote CABS, seeking to withdraw their deposit as foreign currency, or to have the funds transferred into a foreign currency account. This was after the central bank issued the account separation decree.
The effect of the directive was to categorise the applicants’ account as an “RTGS Foreign Currency Account”, which the judge found to be in violation of the company’s rights.
According to Zhou, after the RBZ’s directive, money from the applicants’ account could only be paid in the Bond note and coin, but not in the United States dollar which was the currency in which it is denominated.
The company then went to court, where they argued that they are entitled to payment of the sum of US$142 000.00. They also sought to have Exchange Directive Rl20/2018 declared unconstitutional.
CABS, on its part, denied that it had advised its clients to keep their balance in US dollars. The bank also said that allowing the company to withdraw US dollars would have violated RBZ regulations.
Zhou rejected an argument by RBZ, cited as third respondent, that the Bond note was not a currency. The judge found it “contradictory because the impugned Directive talks of making the Bond note part of the family of currencies in the multi-currency basket”.
The judge also rejected a plea by the Ministry of Finance not to be cited in the case, saying Treasury was the authority responsible for supervising RBZ and therefore “has a direct and substantial interest in the subject matter”.
Excerpts of Zhou’s ruling:
In its October 2018 directive, RBZ said forex from outside the country would be credited into individual or corporate FCA accounts. Local RTGS transfers would go into “RTGS FCA”. However, Zhou argued: “Whichever way the money was credited into the account of the applicants is irrelevant for the purposes of determining the obligations of the first respondent to the applicant because the value of the money is reflected in the credit balance. It is US$142 000.00.”
According to Zhou: “The first respondent cannot claim, as it seems to do, that the money it owed to the applicant was not in United States dollars. The debt is in United States dollars, because the account is denominated in that currency. If it was in some other currency, such as the South African Rand or the Botswana Pula then that would have been the currency of the account. The debt which the first respondent owes to the applicant is therefore in the sum of US$142 000.00 and not some other currency.”
The judge had stern words on what it would mean for banking, if this was allowed to stand.
“Banking would be meaningless if a person deposited a certain sum of money or has money credited into their account only to be told when they demand withdrawal that they can only be paid in some other means of exchange whose value is determined by authorities without recourse to the holder of the account. In such a case the debtor will not be repaying the debt. A debtor cannot unilaterally change the value of its indebtedness,” he ruled.
Zhou says the directive was retrospectively applied, which reduced the value of the money in the account.
“Equality of value is not something that can be arbitrarily or capriciously imposed in the manner that the Governor of the first respondent sought to do in relation to the balance in the applicants’ account. The value of money is its acceptability and can only be fairly determined by the market. If the first respondent intended to introduce an RTGS account with a value equal to or different from the United States dollar account held by the applicant then that decision ought to have affected future transactions rather than existing balances.”
A person cannot just wake up to find their money “means something else”, Zhou found.
“It is offensive to any sense of justice that a person who holds money in a bank can wake up on any day to be told that his money means something else different from what it has always been. The applicants would have been entitled to withdraw United States dollars from their account prior to this Directive being issued. The Directive effectively disables any withdrawal of United States dollars from that account. They can only withdraw bond notes. That reality cannot be altered by renaming the account as an RTGS FCA.”
This change, said Zhou, violates the law. If allowed, it destroys value.
“If the decision of the first respondent (CABS) was to be allowed to stand the effect of it is that the applicants money is now (Zimdollar) 142 000 which is probably less than 4% of its value at the prevailing official rates which this court cannot ignore.”
According to the judge, this is a violation of the right to property.
“It would be contrary to all notions of justice and fairness, and to the rule of law and good governance if the State or the first respondent was to be allowed to simply rename money in an account and decide that it has become something else different from what is in the account. This makes the Exchange Control Directive not only arbitrary and irrational, but fail the test of reasonableness.”
No reasonable person should have made that decision, Zhou said.
“The decision is an incursion of vested rights. No reasonable person who had applied his or her mind to the matters in question would have taken the decision which has the effect of eroding a person’s investment or savings in this manner.”
In a scathing remark, Zhou said the decision violated the principle of good governance.
“The value of good governance is a new feature of our constitutional dispensation having been introduced by the 2013 Constitution. It demands that a new approach to decision making be embraced by all arms of the government and other public institutions.
Power must be exercised with sensitivity to fairness and justice, and in a manner that does not unnecessarily deprive persons of their rights. The Exchange Control Directive is, in my view, illegal, irrational and unreasonable for offending against the rule of law and the constitutional values of good governance. It is therefore unconstitutional”.
Quick Take: Does this affect debts?
In January, the Supreme Court ruled that any debts incurred before February 2019, when the local currency was officially re-introduced, could be settled in Zimbabwe dollars. The latest judgment, therefore, does not change the position on debts.
The ruling also appears to apply to the period before February 2019, when the 1:1 exchange was removed and a new local currency introduced.