Itayi Madziyire v Tony Makwabarara and Lochinvar Properties and The Registrar of Deeds and Companies

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ITAYI MADZIYIRE
versus
TONY MAKWABARARA
and
LOCHNVAR PROPERTIES
And
THE REGISTRAR OF DEES AND COMPANIES


HIGH COURT OF ZIMBABWE
GOWORA J
HARARE, 17 August 2010 and 2 February 2011


O Takaindisa, for the applicant
J Mambara, for the first and second respondents
No appearance for the third and fourth respondents


       GOWORA J: This matter was initialed set down for hearing on 28 May 2010. When
the matter was called I requested counsel to address the issue of the legality of the transaction
between the parties given the existence of two agreements with differing purchase prices.
Counsel duly furnished supplementary heads of argument on the issue and I am grateful to
both for their diligence.
       On 16 October 2006 this court issued a provisional order in favour of the applicant.
The terms of the final order sought which the applicant now seeks to have confirmed are in the
following terms:

TERMS OF FINAL ORDER SOUGHT

   1. That the agreement of sale between the applicant and the first respondent be and is
      hereby declared to be binding between the parties.
   2. That pending transfer of the first respondent’s 100% shares in second respondent to the
      applicant, the first, second and third respondents be and are hereby barred and
      interdicted from selling, leasing, hypothecating or in any way encumbering Lot 38
      portion of Subdivision A and B portion of Lochnivar measuring 2145 square metres
      and Lot 39 portion of Subdivision A and B of Lochnivar measuring 2806 square metres
      and improvements thereon.
   3. That the fourth respondent be and is hereby barred and interdicted from registering or
      in any way approving or consenting to the transfer of the 100% shares in second
      respondent to any person or third party other than the applicant.
   4. That the forth respondent be and is hereby directed and authorized to endorse the title
      deeds of the said Lot 38 portion of Subdivision A and B portion of Lochnivar
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      measuring 2145 square metres and Lot 39 portion of subdivision A and B of Lochnivar
      measuring 2806 square metres and improvements thereon with a caveat giving effect to
      the interdict and only remove such caveat upon the finalization of transfer of the first
      respondent’s 100% shares in second respondent to applicant.
   5. The first and second respondents be and are hereby ordered and directed to effect the
      transfer of 100% shares in second respondent to the applicant and failing them the
      Deputy Sheriff be and is hereby authorized to sign, endorse and do all things necessary
      to transfer the said 100% share holding in second respondent to applicant.

       The background to this application is as follows: The second respondent is a company
that is duly incorporated in terms of the laws of Zimbabwe. The second respondent is also the
registered owner of the immovable properties known as Lot 38 of Subdivision A and B portion
of Lochnivar and Lot 39 portion of Subdivision A and B of Lochnivar. These properties
constitute the only assets of the second respondent. The first respondent is the sole share
holder in the second respondent.
       On 22 February 2005 the first respondent concluded an agreement with the applicant in
terms of which he ‘sold’ his entire shareholding in the second respondent ‘together with two
pieces of land’ situate in the district of Salisbury called Lot 38 portion of Subdivision A and B
portion of Lochnivar measuring 2145 square metres and Lot 39 portion of Subdivision A and
B of Lochnivar measuring 2806 square metres and improvements thereon otherwise known as
Lochnivar Properties. The purchase price in terms of the agreement was recorded as Z$ One
Billion Eight Hundred Million. A deposit of Z$200 000-00 was payable against the signature
of the document. On 9 March 2005 the parties again concluded a written agreement in respect
of the same subject matter. The only difference with the first agreement is that the purchase
price was recorded as Z$ Nine Hundred Million. Under the second agreement no deposit was
provided for.
       The applicant filed this application on 19 October 2009 under a certificate of urgency
and the only agreement mentioned in his papers was the first one in which the purchase price
was reflected as one billion eight hundred million. The provisional order in terms of which he
seeks an order of confirmation was granted on 16 October 2006. The court was at that stage
not aware of the existence of the second agreement which only came to light after the
respondents had filed papers opposing the confirmation of the provisional order.
       Both sides admit the existence of the two agreements. It is common cause that the
operational agreement is the first one, reflecting the higher purchase price. There is conflict
between the parties regarding the reasons why it was concluded. The respondents, who
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brought the agreement to light, aver that the applicant had intimated that he had insufficient
funds to pay towards the costs of transfer and stamp duty and the respondents, in an endeavour
to assist him, then entered into an agreement reflecting a lesser sum as the purchase price. The
applicant on the other hand, states that the first respondent had intimated that he would have
problems with his family on the proceeds of the sale and he therefore requested that the parties
enter into a second agreement with a reduced price. It is not important for present purposes
that I decide or determine which of the two initiated the conclusion of the second agreement.
What is pertinent is that when the parties sought to have transfer effected into the applicant’s
name, it was the second agreement that was referred to the conveyancers and stamp duties,
capital gains tax and conveyancing fees were calculated on the lesser sum. That there was
intent, in so doing, to defraud the fiscus out of stamp duty and capital gains accruing on the
sum of One Billion Eight Hundred Million is not in dispute. This agreement is therefore illegal
and cannot be enforced at the instance of either party.
       The applicant has however, in heads of argument, suggested that the second agreement
reflects the actual position between the parties and it is that agreement that he has always
sought to have enforced. Although in heads of argument Mr Takaindisa seemed to be
suggesting that the agreement could be enforced in argument he accepted that the second
agreement was a continuation of the first and that if the purpose was to defeat the fiscus then
the whole transaction was tainted by illegality. In Chipunza v Zangaza 2004 (1) ZLR 377 at
379B-D UCHENA J stated:

       “……the first agreement was entered into for the purpose of enabling the seller to
       avoid paying Capital Gains. It had a false purchase price and it had a false declaration
       on improvements. It was on this agreement that both seller and purchaser made their
       declarations using incorrect information when each of them was aware of the correct
       position as per second agreement dated 25 June 2000. They both concealed the
       existence of the second agreement from the conveyancers. The two agreements would,
       if the parties had succeeded in this deception, enabled them to cheat the Treasury and
       benefit themselves by paying lower Stamp Duty fees and not paying Capital Gains
       Tax. To achieve this both agreements were required: the first for registration purposes
       and to deceive the Treasury, the second as security for the deceiving parties in case one
       of them was tempted to turn against the other and enforce the first agreement to the
       disadvantage of the other”.

       The remarks by UCHENA J in the Chipunza case are apposite in this matter and I
respectfully associate myself with them. The parties herein concluded a second agreement
which was the enabling agreement for purposes of transfer from the second respondent to the
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applicant. The stamp duties and capital gains tax were calculated on the purchase price of
Z$800 million and both parties concealed the existence of the first agreement to the
conveyancers. As in Chipunza’s case the parties would have benefited two fold; first through
the payment of lower duties and taxes to the fiscus and secondly in that they would have the
security of the second agreement with the higher price which would hedge each of them
against deceiving the other.
       The Stamp Duties Act [Cap 23:09] provides in s 44 as follows:

       “Every contract, agreement or undertaking made for the purpose of evading, defeating
       or frustrating the requirements of this Act as to the stamping of instruments, or with the
       view to precluding objection or inquiry relative to the due stamping of any instrument
       shall be void.”

       The parties herein assumed, incorrectly, that the first respondent had to conclude an
agreement in order to sell to the applicant the immovable properties registered in the name of
the second respondent by virtue of the former being the sole shareholder in the second
respondent. It is clear that the disposal by the first respondent of his sole shareholding to the
applicant is all that was required in order for an effective sale to come into effect in respect of
the immovable properties. The first respondent did not own them and even if he sold them he
could not pass transfer except as an authorized representative of the second respondent. In the
event, no stamp duties would be due on the agreement to dispose of the shares. Thus the
agreement to dispose of the shares does not fall foul of the Stamp Duties Act.
       In terms of the Capital Gains Tax Act [Cap 23:01] shares are defined as a marketable
security which fall under the broader definition of specified assets the sale of which is subject
to capital gains tax on any amount remaining after the deduction of any amounts permitted by
law. The first and second respondents are not persons entitled to exemptions in respect of the
disposal of specified assets. It goes without saying that the conclusion by the parties of a
second agreement on which the transfer or submission to the Revenue Authority for the
assessment of capital gains would have resulted in a lesser sum being levied for payment.
Although the Act does not specifically declare that agreements whose effect is to deprive the
fiscus of tax are illegal, there is provision in the Act for such contracts to be found as falling
foul of statutes providing for the collection of revenue. Section 29 of the Act provides:
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       “The provisions of s 98 of the Taxes Act relating to tax avoidance shall apply, mutatis
       mutandis, in relation to this act, for the purposes of providing for and giving effect to
       the matters concerned in relation to this Act.”

In turn s 98 of the Income Tax Act [Cap 23:06] provides:

       “Where any transaction, operation or scheme (including a transaction, operation or
       scheme involving the alienation of property) has been entered into or carried out,
       which has the effect of avoiding or postponing liability for any tax or of reducing the
       amount of such liability, and which in the opinion of the Commissioner, having regard
       to the circumstances under which the transaction, operation or scheme was entered into
       or carried out-

       (a) was entered into or carried out by means or in a manner which would not normally
           be employed in the entering into or carrying out of a transaction, operation or
           scheme of the nature of the transaction, operation or scheme in question;

       (b) has created rights or obligations which would not normally be created between
           persons dealing at arms length under a transaction, operation or scheme of the
           nature of the transaction, operation or scheme in question; and the Commissioner is
           of the opinion that the avoidance or postponement of such liability or the reduction
           of the amount of such liability was the sole purpose or one of the main purposes of
           the transaction, operation or scheme, the Commissioner shall determine the liability
           for any tax and the amount thereof as if the transaction, operation or scheme has
           been entered into or carried out, in such manner as in the circumstances of the case
           he considers appropriate for the prevention of diminution of such avoidance,
           postponement or reduction.”

       By parity of reasoning the second agreement would run foul of the section. Indeed the
applicant accepts that the second agreement would run foul of the section as its intended
purpose was to reduce the stamp duty or capital gains tax payable by the purchaser on the one
hand and the seller on the other. In my view the fact that the Capital Gains Tax Act itself,
unlike the Stamp Duties Act does not declare that agreements for the avoidance of capital
gains tax are void does not in itself detract from the illegal nature of the transaction. In any
event, it is a universal principle of common law that any agreement whose aim is to deprive
the fiscus of revenue is illegal and therefore void ab initio and incapable of being enforced. To
this end it is a general policy of the public law that all agreements seriously made should be
enforced. However, public policy requires that freedom of contract should not be completely
unfettered and consequently contracts tending to harm the State or the public will not be
enforced. Agreements contrary to law, public policy or good morals cannot be enforced
through the courts as they considered not to be founded on a justa causa but upon a turpis
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causa, illegal or immoral cause. There is a clear infringement of the doctrine of public policy it
is apparent, either directly from the terms of a contract or, indirectly from other circumstances
that the design of one or both of the parties is to defraud the revenue, whether national or local.
       ‘In general it can be stated that an apparently lawful promise if knowingly made for an
illegal purpose will not be enforced, a promise illegal in itself will not be enforced, and a
promise made in return for an unlawful consideration will not be enforced’. See Kennedy v
Steenkamp 1936 CPD 113 at 116.
       The question that cries for an answer is whether or not the applicant can succeed in
applying for specific performance in respect of the agreement that reflects the correct purchase
price. In view of the dicta in Chipunza’s case it is my view that the whole transaction has been
tainted by illegality and the two agreements cannot be separated or divided. The second
agreement was a continuation of the first agreement, in that in so far as the first was meant to
protect the interests of both parties as seller and buyer and reflected the real contract between
the parties, the second was meant to facilitate the underpayment by either one or both of
parties of stamp duties and capital gains tax. As a consequence, the first agreement is itself an
illegal agreement. An illegal agreement is void of legal effect. The effect of the agreement
being illegal is that neither party can bring an action founded on the agreement. Such a
contract, being void ab initio, does not create obligations and therefore no claim can be
brought to enforce what was promised in the agreement, ex turpi vel iniusta causa non oritur
acto. The court will not enforce an illegal agreement, thus the court cannot grant specific
performance by one party even though such party has undertaken to perform an obligation in
terms of the illegal agreement. The other party can also not claim damages as none can flow
from an illegal contract.
       In this instance the applicant has paid the full sum of the purchase price, this does not
however validate the agreement which remains illegal. This point was emphasized in Dube v
Khumalo 1986 (2) ZLR 103 (S) at 109D - where GUBBAY JA as he then was stated:

       “There are two rules which are of general application: the first is that an illegal
       agreement which has not yet been performed, either in whole or in part, will never be
       enforced. This rule is absolute and admits no exception. See Mathews v Rabinowitz
       1948 (2) SA 876 (W) at 878; York Estates Ltd v Wareham 1950 (1) SA 125 (SR) at
       128. It is expressed in the maxim ex turpi causa non oritur action”.

       The second is expressed in another maxim in pari delicto est conditio possidentis,
which may be translated as meaning “where the parties are equally in the wrong, he who is in
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possession will prevail.” The effect of this rule is that where something has been delivered
pursuant to an illegal agreement the loss lies where it falls. The objective of the rule is to
discourage illegality by denying judicial assistance to persons who part with money,
incorporeal rights, in furtherance of an illegal transaction. But in suitable cases the courts will
relax the par delictum rule and order restitution to be made.
         They will do so in order to prevent injustice, on the basis that public policy “should
properly take into account the doing of simple justice between man and man”.
         The applicant has not however invited the court to relax the par delictum rule in order
to achieve justice between himself and the first and second respondents. The applicant has
invited the court to order specific performance thus enforcing the illegal agreement. This the
court cannot do and the application must fail.
         As to costs it was accepted by counsel for both the applicants and the respondents that
there should be no order of costs as each party participated in the illegality that has tainted the
transaction. I agree. In the premises the court cannot give effect to an illegal transaction and
the application therefore fails.
         The provisional order issued by this court on 16 October 2006 be and is hereby
discharged. Accordingly, the application is dismissed and each party is ordered to pay its own
costs.




T H Chitapi, legal practitioners for the applicants
J Mambara & Partners, legal practitioners for the respondents