KCM – What is the meaning and significance of the recent ruling by the South African High Court?
By Elias Chipimo
There appears to be no end to the intrigue surrounding KCM. In the most recent development, a South African High Court has determined (the so-called “Johannesburg ruling”) that the decision by ZCCM-IH to petition the Zambian High Court for the winding-up of KCM constitutes a breach of the Shareholders Agreement between Vedanta and ZCCM-IH (among others) and should be immediately withdrawn. This decision has certainly exposed some of the limitations and weaknesses that seem inherent in our local judiciary. However, before looking at the merits and implications of the Johannesburg ruling, it will be useful to briefly review how we arrived at this point.
The Zambian government had been facing pressure to respond to various matters concerning KCM, including: the long-standing crisis of its poor payment history to Copperbelt mine suppliers; the general perception of a lack of regulatory compliance in respect of its mining operations; and the publicly stated allegations by ZCCM-IH that Vedanta was not fulfilling its obligations under the KCM Shareholders Agreement, such as payment of dividends and ensuring that the company was operating in a way that would improve productivity and profitability for all stakeholders including ZCCM-IH as a minority shareholder.
No doubt after years of frustration and with a general election looming (in 2021), something had to be done. In essence, the Government had four main options to address these challenges (although it is important to note that these options are not necessarily mutually exclusive):
(a) begin a process of compulsory acquisition of KCM’s assets and find a new owner to develop the mining opportunity (Option 1);
(b) cancel KCM’s mining licence citing breach of the Mines and Minerals Act with a view to identifying a new entity to develop the mines (Option 2);
(c) seek to wind-up KCM and identify an investor to take over the mining operations (Option 3); or
(d) enter into negotiations with Vedanta for the sale and handover of KCM’s mining assets to government or a third party buyer (Option 4).
When these options are examined closely, it becomes clear that they all have their limitations. Compulsory acquisition is a long drawn out process and requires compensation to be paid, apart from the fact that the acquisition process can be delayed by court action challenging its implementation. Cancellation of a mining licence requires strict adherence to the procedures laid down in the Mines and Minerals Act and is open to being legally challenged, potentially delaying a concluded outcome. Winding-up sends the wrong signal to investors about the stability of the investment climate and the commitment of government to its contractual obligations. Negotiations with Vedanta would not have amounted to anything constructive in addressing the main concerns of the Government: that they were dealing with an investor who had outlived their welcome in the eyes of the people in the one critical location that would probably determine the outcome of the next general election – the Copperbelt.
The Government probably chose Option 3 because: (i) it presented the quickest route to removing Vedanta from day-to-day control of KCM’s mining operations (something that would cheer the Copperbelt residents and make the government look like it cared about their plight and was taking decisive action to resolve their grievances); (ii) it would avoid payment of compensation to Vedanta (which, as already stated, would be applicable on a compulsory acquisition); (iii) it would put the government in the driving seat of negotiations for the transfer and sale of KCM’s assets – especially if the liquidator to be appointed was a connected person. This would in turn allow the government to more directly determine who would eventually acquire KCM’s unencumbered mining assets (although the danger of this is that it also creates the opportunity for the serruptitious syphoning of funds out of KCM – depending on the integrity of the person appointed as liquidator).
The difficulty with the approach that the Government and ZCCM-IH (who were clearly working in tandem) eventually settled upon is that they chose the wrong entity to lodge the winding-up application. As a party to the Shareholders Agreement, ZCCM-IH is bound by the provisions relating to arbitration of any dispute between the parties, meaning taking the matter to court (by lodging a winding-up petition) as opposed to commencing arbitration proceedings in Johannesburg would constitute a breach of the Shareholders Agreement, which is essentially what the Johannesburg Court ruling is stating. Had a different creditor or applicant (i.e. anyone other than a party to the Shareholders Agreement) lodged the winding-up petition, the issue of arbitration would not have arisen. There seems to have been a belated realisation of this with certain relatively minor creditors now being paraded to make the winding-up petition appear more credible – an action that will do little, if anything, to rectify the ZCCM-IH position.
The judge in the South African Court reasoned that:
(a) the issues complained about by ZCCM-IH in the winding-up petition before the Zambian High Court amount to matters that can properly be defined as a “dispute” under the Shareholders Agreement;
(b) according to the Shareholders Agreement, any dispute between the Shareholders is to be determined by arbitration in Johannesburg;
(c) the arbitration clause within the Shareholders Agreement is a contractual agreement between the parties that grants exclusive responsibility for determining any dispute to an arbitrator and not a court; and
(d) in order to protect this contractual right to arbitration of any dispute, it was necessary to issue an order compelling ZCCM-IH to withdraw the winding-up application before the Zambian High Court.
There has been a lot of panic and speculation about whether the decision of the South African High Court is enforceable in Zambia. The Government claims that the Johannesburg ruling amounts to an interference in our judicial system and would only be applicable if it was registered in Zambia, which was not possible because Zambia and South Africa have no reciprocal enforcement provisions in their laws. The judge in the South African Court was alive to this challenge and dismissed such reasoning on the grounds that the instruction to withdraw the winding-up application is addressing an order in personam, meaning it is directed at ZCCM-IH and not at the Zambian High Court and as such, it does not amount to an interference by a South African court in the Zambian judicial system. Put more simply, the Johannesburg ruling is intended to bind ZCCM-IH and not the Zambian High Court.
So what does this all mean for Zambia? Practically, both ZCCM-IH and the Government can continue to ignore the Johannesburg ruling and press on with the winding-up process as they appear determined to do. However, the implications for ZCCM-IH (and therefore the nation) are that when the matter eventually goes to arbitration, the damages to be paid are likely to be much higher. The Johannesburg ruling has more or less demonstrated the oddity of the reasoning behind the decision to allow the winding-up application to have seen the light of day in a any court, when the jurisprudence on matters of international arbitration seems well settled.
Once the arbitration has been finalised and assuming, as many have probably correctly concluded, that Vedanta are awarded substantial damages (which could of course be reduced by any counter-claims that ZCCM-IH may have), the award will be registered in Zambia and fully enforceable as though it was a judgement passed in Zambia. Given this position, what would be a sensible way forward?
It is only fair to acknowledge that the economic and social problems in Chingola, specifically and on the Copperbelt in general, are real and that given the central role that KCM plays in the prosperity of both the city and the province, the Government had to do something to arrest the decline. The problem is the unstructured nature of the intervention. It is not, however, too late to engage in discussions on a less chaotic way forward for KCM. The continuation of Vedanta as the main investor on KCM is clearly untenable and what is needed now is an agreed exit plan – something Vedanta would probably be less unwilling to consider now than in the past. The Government can use its considerable leverage to settle reasonable compensation to Vedanta which would take into account the claims by ZCCM-IH and any non-compliance with the Mines and Minerals Act. The Shareholders Agreement actually contemplates mediation and this approach would be broadly in line with that spirit.
The issue of compensation will no doubt be a sticking point given the bumbling nature of the winding-up and how it has helped the cause of Vedanta but whatever compensation amount would be agreed could be settled through the proceeds of the sale of the unencumbered mining assets to a new owner.
Attempting to fight the Johannesburg ruling with the argument that the Shareholders Agreement is governed by Zambian law is nothing short of folly. We are better off saving the country further loss and negotiating a managed exit of Vedanta. The sad reality though is that when all is said and done, we are back to dealing with the impact of ineptitude, greed and a lack of clarity about how to safeguard the nation’s most prized assets and indeed the somewhat deeper problem of how to competently manage the nation.
Elias C. Chipimo
National Restoration Party