Zambia: SUN PHARMACEUTICAL SAGA

Frank and Hirch Ltd./Sun Pharmaceuticals Ltd.

Sun Pharmaceuticals was founded in 1963 as Frank and Hirsch (Northern Rhodesia) Ltd., a year before Zambia gained independence. The company was a sister company of a South African business. In 1974, the then owners of the company considered opening a factory to produce pens, sunglasses and disposable syringes, but the nationalisation process by the Zambian government at the time prevented the owners from investing further in Zambia. They exited the business and sold it to a company in which the late John Kalenga, a local liquor store owner and politician, was a shareholder.

After the original owner of Frank and Hirsch sold the company, the new owner attempted to move forward with the syringe project. However, Mr. Karenga’s financial situation was very poor and he had faced financial insolvency and bankruptcy for many years, which made it difficult to move forward with the project. Around this time, the company was distributing wireless Motorola radios and Grundig televisions in Zambia.

On February 25, 1982, the company signed a loan agreement to borrow US$670,000 from the Development Bank of Zambia (DBZ) to build a disposable syringe factory. The terms of this foreign currency loan were favorable to the company, providing for a repayment period of six years and a grace period of two years. However, the company could not withdraw the loan for one year because it failed to pay a 2% commitment fee to the bank. The first loan was disbursed on April 22, 1983 in the amount of UAH 79,000.

It took another six years for the company to import some of the machinery in 1988. However, the company was unable to implement the project due to its inability to pay for the transaction. Therefore, after six years of delay in importing the equipment, the equipment was stored in Manica Freight’s warehouse for another three years as the company was also unable to pay storage and demurrage charges. This, coupled with the company’s failure to obtain a site and build a facility for the equipment, led to a default on the DBZ loan, and the bailiffs seized the assets of the company and the late Mr. Kalenga.

Meanwhile, the Development Bank of Zambia issued a final notice after the late Mr. Kalenga failed to prove that the company had sufficient funds to complete the project. The Development Bank of Zambia was concerned that the equipment purchased was exposed to the elements in the open-air storage yard of the liquidation agent. In fact, as the Development Bank of Zambia later confirmed, the equipment was damaged during the three years it was stored in the open-air storage yard. The bank proposed to sell the equipment to new investors.

Mr. Kalenga was desperate to seek investors to save his assets from DBZ and the court bailiffs. In December 1990, Mr. Vinod Sadhu, an Indian businessman who had immigrated to Zambia in 1978, heard about Frank and Hirsch’s project to produce disposable syringes in Zambia and the company’s troubled situation. Mr. Sadhu had made his fortune by supplying specialty steel products, mining equipment and tools to the mining industry. He also had interests in engineering, project development and manufacturing. John Kalenga pleaded with Mr. Sadhu to help save the company from financial ruin. Mr. Vinod Sadhu believed that the project would greatly benefit Zambia and the region at a time when the AIDS crisis was growing and a shortage of sufficient numbers of disposable syringes and reusable glass syringes were prevalent.

In January 1991, Mr. Vinod Sadhu, through his holding company, acquired a majority stake in Frank and Hirsch Ltd and together with his team of talented local and expatriate employees immediately:

• He relocated the company’s headquarters from Lusaka to Mpelembe House, Broadway, Ndola, the headquarters of its sister company, Sunvest Limited.
• He lent DBZ US$800,000 to repay the loan and DBZ was also informed of the change in shareholding.
• Paid overstock charges to Manica Freight Company and delivered crates containing some equipment to a warehouse in the Heavy Industrial Area of ​​Ndola.
• Ordered balancing equipment for the project that was not purchased by the previous owner.
• As part of his strategic vision, Mr. Vinod Sadhu initiated the process of renaming the company to Sun Pharmaceuticals Ltd. This change was intended to better align the company’s identity with its core business of manufacturing disposable syringes. It also established a clear link with his sister company Sunvest Limited, creating a cohesive business structure.
• He and his new management team initiated the construction of a modern pharmaceutical factory in technical partnership with the German company DEMAG. This move will bring international standards and expertise to the Zambian pharmaceutical industry. The factory, which was funded by Mr Sadhu, is a fully sterile, air-conditioned facility with additional high-load connections, deep water tube wells and secure, first-class infrastructure. The factory was built on land owned by Mr Sadhu’s sister company, Sunvest Limited, further demonstrating his commitment to the project.

Mr. Sadhu’s financial commitment to the project was just the beginning. He injected significant additional capital as working capital to expand the business, demonstrating his strong belief in the potential of the project. This funding and commitment was crucial in saving a completely abandoned project for Manica Freight into a viable one.

The failure of the previous owners to implement the project and the subsequent change in ownership was recorded in the decision of the Ndola High Court following a public trial on 7 December 2001 (1995/HN/307) and the decision of the Supreme Court of Zambia (SCZ/8/390/2001 Appeal No. 20/2002).

Mr Kalenga wished to continue to participate in the project as a minority investor, but was required to contribute capital. However, as the project progressed, the company required the capital contribution, which he failed to do, resulting in the dilution of his shareholding and his exit from the project. Mr Kalenga died in September 1993 while receiving medical treatment in South Africa. Prior to his death, Mr Kalenga admitted that Mr Sadhu had completed the plant without his contribution and owed Mr Sadhu ZK391 million. Mr Sadhu chose not to pursue the late Mr Kalenga’s estate for the unpaid amount or the three plots of land that Mr Kalenga had promised to transfer to the company.

In July 1994, Sun Pharmaceuticals began producing disposable syringes of Western manufacturing quality. The factory was officially inaugurated by the then Minister of Health (and later President of Zambia), the late Michael Sata, on behalf of a presidential delegation. The project is the first of its kind in the region. It is expected to generate $29 million in revenues in the first five years of operation, valuable foreign exchange for Zambia, in addition to creating local jobs and meeting urgent medical needs within the country.

In February 1995, DBZ defaulted on its loan to Sun and was charged penalty interest on the basis of “poor record keeping”. DBZ used this as a basis to seek to place Sun into receivership so that it could take over the factory. Sun challenged the appointment of the receiver and prevailed in the Supreme Court; the decision became a selective decision of the Court in several proceedings (Development Bank of Zambia and KPMG Peat Marwick v Sunvest and Sun Pharmaceuticals Limited 1997 3) (1997) ZMSC 11 (5 March 1997). These proceedings were exclusively defended by Mr Vinod Sadhu and his legal team, led by the late Mr George Kunda. The company continued to honour its commitment to supply the government hospitals even when payments due were delayed or not made at all.

Although the Development Bank of Zambia filed another lawsuit in 1995, Sun Pharmaceuticals Ltd. stood its ground and took its case to the Supreme Court of Zambia. After twelve years of protracted litigation, including a public trial at the Ndola High Court, two appeals to the Supreme Court and a final ruling by the Lusaka High Court under the supervision of the Supreme Court, the case was finally decided in the company’s favour in 2007.

In 2007, at the conclusion of the litigation between the Development Bank of Zambia and the Government of Zambia against Sun Pharmaceuticals Ltd, Sun Pharmaceuticals instructed its lawyer George Kunda and company to obtain from DBZ the title deed for stall number 6888 in Lusala, which was owned by Euro Butchery.

The building was one of the collaterals seized by marshals sent by the Development Bank of Zambia following foreclosure proceedings against Frank and Hersh (Zambia) in 1989/1990, when the company was chaired by the late John Kalenga. Sun Pharmaceuticals’ lawyers, acting on Mr Sadhu’s instructions, obtained the title deeds and handed them over to the Kalenga family, who acknowledged that they no longer had business dealings with Sun Pharmaceuticals.

In 2018, 25 years after Mr Karenga’s death, his estate obtained an ex parte order from the Lusaka High Court within a day of their application to change the company’s shareholdings, based on their false testimonies that the company “had never been sold” and that Mr Sadhu was merely “an employee appointed by his late father” who “stole the company” after his father’s death.

It is noteworthy that the Estate had not taken any action in the 25 years since Mr Kalenga’s death. While there was no court proceeding against them, Sadhu’s lawyers received a tip-off that a highly irregular action was afoot to change the shareholdings of the company. The lawyers immediately drew the attention of the High Court to the fact that a far-reaching ex parte order had been passed without hearing the affected parties. The Court agreed to set aside the ex parte order. The matter proceeded to an inter partes hearing during which State Counsel Mr Irene Kunda raised a preliminary issue that the case was governed by the statute as Mr Kalenga had died 25 years ago. During this period, the Estate had not made any claim against the company or its owners.

The Kalengas’ lawyers filed an application to “stop the passage of time” with the court on the basis that they alleged fraud but the court found no evidence of fraud and that this was not an applicable case for “stop the passage of time”. The court ruled that time should have run from 1999 when the Kalenaga family established the estate and could bring the action, rather than 1993 when the late Mr Kalenga died. However, even by this standard, the claim was untenable and the claim was dismissed in August 2018 as time-barred, reaffirming the court’s dismissal of the Kalengas’ claim. 2018/HP/1056

The Kalengas appealed to the Court of Appeal, which rejected their arguments and upheld the High Court’s order in April 2019. (Appeal No. 152/2018) The court made several rulings, for example, it was clear that the Kalengas were waiting for the company to receive payment in its successful legal battle with DBZ before coming forward. The court also noted that if they felt they had a claim, they could have applied to join the dispute between Sun Pharma and DBZ, but they never did so during the litigation. The court ruled that litigation was not the company’s sole business and that PACRA company records were public documents that anyone could access.

“It is clear that (Kalengas) knew about the (Development Bank of Zambia v. Sun Pharmaceuticals) litigation and waited until the payment was made before taking action… The appellant can even apply to intervene when the case is heard in the High Court or even the Supreme Court because the money was not for (Sadhus) personally but for the company. The litigation was not the only business of the company because the (PACRA) return was filed as early as 2003.”

The Karenga family applied to the Supreme Court, but the Court of Appeal dismissed their appeal in a second decision in November 2019: case number 35/2019. However, they were allowed to apply to the Supreme Court of Zambia for an appeal. In February 2020, the Supreme Court dismissed their final appeal and upheld the judgment of the Court of Appeal dated 13 February 2020 in favour of the Sadhu family as the legal owners of Sun Pharmaceuticals Limited, case number SCA/8/34/2019.