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28 September 2022

Over the years, there has been a growing stance in the money lending sphere in which the loan agreements are drafted in a way that passes off as an ultimate sale of the collateral granted by a borrower. Typically, the question that arises when there is a dispute between the parties is whether the transaction is one which creates an absolute interest (e.g. by way of sale) or one which is less than absolute (e.g. a security interest). In this article, we explore the distinction between the form and substance in the characterisation of finance agreements.

What is Recharacterisation?

At the outset, it is necessary to clarify that the process of recharacterisation is distinguished from that of interpretation or construction. The latter is concerned with ascertaining the meaning of words and language so as to determine their application to a set of facts whereas the former seeks to identify the legal category of a transaction in order to determine its legal effects. This article focuses on a situation where the parties to a transaction have purportedly characterised it as creating one kind of interest, but the court characterises it, as a matter of law, as creating a different kind of interest.

What does form over substance mean?

The primacy of what is seen as legal form over substance is premised on the principle of freedom of contract. It is understood that consenting parties must be allowed to be bound by the terms they consciously agree to. The focus of the Court under the form leg is to rubber stamp that which the parties have agreed within the four corners of their agreement and any pre-negotiations that did not make it to the agreement are not considered. Therefore, where the parties agree that the ultimate end arising from a default will be a sell, any contrary evidence indicating otherwise will have no bearing on the agreement. This can be likened to a saying that “an elephant will be considered a bird when it has feathers and can fly”

Illustrative of the views above is the case of Kalusha Bwalya v Chardore Properties Limited and Another (HPC 294 of 2009) [2012] ZMHC 36 (“Kalusha Bwalya Case”) whose facts are that Mr. Bwalya approached Chardore Properties Limited (“Chardore”) through its representative for a loan of USD 26, 250.00. Chardore agreed to lend Mr. Bwalya the said amount on condition that he deposits the title deeds to his property, Stand 921 Woodlands, Lusaka. Subsequently Mr. Bwalya executed a contract of sale and deed of assignment in respect of the property and upon his default on the loan, Chardore proceeded to transfer the property   in its name on the prefix that the same was sold to it by Mr. Bwalya.

In this case, the Court found that it was clear from the agreement that the intention of the parties was for the Property in question to be sold upon default. The compelling circumstances under this case were that Mr. Bwalya unequivocally relinquished and signed an acknowledgment in which he stated that the sum of USD 26,250.00 was the purchase price for his property. Any attempts to show that this was a loan agreement were futile as the written intention was for the transaction to create an interest by way of sale and not security.

Are the Zambian Courts moving towards substance than form in recharacterisation of finance agreements?

More recently, however, a new approach emphasizing on substance over form has evolved in recognition of the power imbalance inherent in finance agreements between a borrower and a lender. In view of the borrower being perceived as a weaker party, the courts are concerned exclusively with the provisions of the written agreement entered into by parties. This evolution has been seen in recent judgments such as the case of Eva Chiboni v New Future Finance Company Limited 2020/HPC/0776. The brief facts are that Ms. Eva approached a representative of New Future Finance Company Limited (“New Future Finance”) for a loan of ZMW 250,000.00. However, she was informed that New Future Finance would only lend her a sum of ZMW 216,000.00 which she ought to pay within a period of four (4) months on condition that she provides security over real property. Subsequently, Ms. Eva offered property No. F/916/34/A4 for this purpose and was consequently made to execute a contract of sale and a deed of assignment. In contrast to the Kalusha Bwalya Case, Ms. Eva communicated to New Future Finance that she did not understand what she was asked to execute. In response, the representative assured her that it was only but a formality to the finance agreement. Upon Ms. Eva defaulting on the loan, New Future Finance proceeded to transfer the property in its name on its understanding that the same was sold to it by Ms. Eva.

We see a different approach in the Court’s determination of whether the property was sold to New Future Finance or not. The court interrogated the substance of the agreement and not only the form. The Court first ascertained whether the written agreement between the parties was a sham, that is, it neither accurately reflects the true agreement between them nor is it intended by the parties to do so. The Court was of the view that the agreement was a sham as it was filled with deceit and did not reflect the true intentions of the parties. We see a different dawn to how loan agreements are viewed here. Particularly, the Court dismissed the contract of sale and the deed of assignment that was executed by Ms. Eva and looked at extrinsic evidence that showed that she had no intention of selling the property as she did not understand those documents in the first place. The Court recharacterized what was perceived to be an absolute interest by way of sale into the lender only having an interest in the property by way of security.


At the heart of recharacterisation lies the question of self-determination: to what extent are parties free to prescribe the legal consequences of their acts by adopting particular forms and terms? One thing that is clear is that the Courts will not allow an agreement that is drafted in a manner that gives the lender an interest by way of security over a collateral to be passed and implemented as an absolute sale. This re-enforces the principle that the relative bargaining power of the parties is taken into account in deciding whether the terms of any finance agreement in truth represent what was agreed and the true agreement will often have to be gleaned from all the circumstances of the case, of which the written agreement is only a part. Unless the transaction is a true sale, entities involved in the money lending business must ensure that any collateral taken is documented as such and that the security documents are duly registered at the relevant public registries.