NAREP president Elias Chipimo has warned that the chaotic takeover of Konkola Copper Mines and the planned sale of the mine will have serious legal implications on Zambia because Vedanta will have a strong case against government after the case has settled.

Responding to a press query, Chipimo who is a respected Lusaka-based lawyer, noted that the legitimacy of the process which the government had embarked on of selecting a buyer for KCM was not backed by law.

Below is the full analysis by Elias Chipimo on the KCM saga:

The process of selecting a buyer for the assets of KCM has begun in earnest and all the stops have been pulled to ensure that a buyer (probably Chinese) is found within the shortest possible time. However, the legitimacy of such action is not supported by law and will result in significant claims for damages by Vedanta after all the dust has settled.

The first thing to point out is that any sale of a major asset of KCM can only legitimately take place after a winding-up order has been made and not before. There are several reasons for this:

(a) we need to understand from the outset that the appointment of a provisional liquidator (as opposed to a “full liquidator” – i.e. a person appointed after the winding-up order has been granted) is a stop-gap measure to cover the period between: (i) the presentation of a winding-up petition (which may or may not eventually succeed); and (ii) the date on which the court grants a final winding-up order – we can call this period the ” winding-up determination period “;

(b) the provisional liquidator has certain powers that he or she can exercise during this winding-up determination period and these powers are the same powers as the powers of a full liquidator ” subject to such limitations and restrictions as may be prescribed ” (see section 65(2) of the Insolvency Act). What this means is that the limitations placed on the full liquidator will be the same limitations affecting the provisional liquidator;

(c) the role of a liquidator (be it a provisional or full liquidator) is not to keep the business operating but to close it and he or she only has power to run it for 4 weeks following the granting of a winding-up order. The sole purpose of keeping the business running is to facilitate a managed closure for the purpose of an orderly winding-up and not for the purpose of making it viable or for any other reason (section 74(1) of the Insolvency Act);

(d) upon reading sections 74(2)(e) and 74(3)(c) of the Insolvency Act, it becomes clear that a liquidator has the power to dispose of the company’s assets in two situations: (i) he or she can dispose of general assets when authorised either by the court or a Committee of Inspection (i.e. a team appointed to oversee the actions of the liquidator on behalf of the shareholders and creditors); and (ii) he or she can sell ” real and personal property and things in action ” only after the winding-up order has been made and not before;

(e) it is possible that a winding-up order may not ultimately be granted and this is where a distinction comes into play between: (i) what a liquidator is allowed to do generally (section 74(2) of the Insolvency Act); and (ii) what a liquidator is allowed to do specifically for the purpose of ” winding-up and distributing the assets of the company ” (section 74(3) of the Insolvency Act);

(f) the provisional liquidator is subject to these same limitations and restrictions in conformity with section 65(2) of the Insolvency Act, meaning some of the powers of a liquidator (i.e. those set out in section 74(3) of the Insolvency Act, which includes the sale of the business) can only be exercised as part of the process of distributing the assets on winding-up and not before the final winding-up order has been granted. In short, the provisional liquidator cannot exercise the powers set out in section 74(3) of the Insolvency Act (which includes the power to sell the business or transfer any mining rights).

The sad reality, however, is that in spite of the questionable nature of some of the procedures so far, a sale of KCM’s major assets by the provisional liquidator may still take place – such is the chaotic nature of the system we are all forced to live with for now. However, even if such a sale does take place, this will not prevent an arbitration process from taking off and is more than likely to result in substantial damages being awarded to Vedanta and any other person with a legitimate claim resulting from these questionable procedures. Given that we are still reeling from the compensation claims arising out of the Zamtel sale arbitration and given the significant debt burden hanging over us, the actions of the PF administration are not only reckless and dangerous but give rise to concerns about a growing pathological criminality – the type that takes full root when there is a feeling of complete impunity amongst the leaders of a nation.

Let us all be clear, it is only the provisional liquidator (someone appointed after a petition has been filed but no final winding-up order has been made yet), the liquidator (the person appointed after a winding-up order has been made) or the Official Receiver (essentially a government official either appointed by the court or who assumes office by the operation of law) that can legally manage a liquidation procedure. The steps the government is taking to progress the asset sale (appointing negotiators and directing matters from behind the scenes) amount to an illegal interference of the liquidators powers (see section 74(4) of the Insolvency Act) and are likely to be a factor in an inevitable compensation claim that will no doubt form part of the arbitration proceedings. Any members of any such illegal government committee will also face claims for any allowances they might receive from KCM (or from any other official source) for participating in this process without the backing of the law.

In addition, given that the arbitration will be between Vedanta and ZCCM-IH, Vedanta will have a viable basis to lodge a separate claim against the government in respect of the violation of its property rights under the Constitution. What has essentially happened is that the government has sought to carry out a compulsory acquisition without paying compensation to an investor perceived legitimately by the majority to have failed to live up to its expectations.

So what should government have done, given the challenging situation presented by KCM? Two things, simultaneously: (a) ZCCM-IH should have triggered the arbitration procedure under its agreement with Vedanta; and (b) government should have started compulsory acquisition procedures. There are those that advocated either the appointment of a receiver or the application of the business rescue procedure under the Insolvency Act. Unfortunately, none of these options were viable for the simple reason that: (i) the appointment of a receiver can only be triggered by a secured or preferential creditor; and (ii) the business rescue procedure would have required KCM as a company to pass a special resolution, meaning the consent of Vedanta would have been required. It is highly unlikely that this would have been forthcoming.

The Chinese have a saying: “May you live in interesting times”. This can be read as either a blessing or a curse. Sadly for many Zambians living under the tyranny of the current regime, it tends to only be read as the latter. Any costs arising from the PF administration’s careless approach to resolving the KCM challenge will be borne by innocent Zambian taxpayers already burdened by debilitating debt, whose repayment will outlive many of them. But then again, does concern for public interest and future generations really concern the PF? Apparently, not one bit.