• Company Law Reforms in Tanzania: The Companies Act 2002
  • June 27, 2006 | Author: Florens D. A. M. Luoga
  • Law Firm: Ako Law in association with Clyde & Co. LLP - Dar Es Salaam Office
  • Prior to the 1st of March earlier this year, the main legislation relating to companies in Tanzania was the Companies Act Cap. 212 which was enacted in 1929. This legislation regulated trading companies and other associations including the imposition tax on nominal capital, regulation of dividends and surpluses and related matters. This legislation was in force for over 77 years which period covered not only the tail end of the colonial period but also the period of state-planned economy through to liberalisation in the 1990s. Clearly it was time for reform to cover an increasingly sophisticated market and the dramatic changes to the Tanzanian economy.

     

    The new reforms are contained in the Companies Act 2002 (the “CA 2002”), an act on the shelf for almost three years which came into force as from the 1st of March, 2006.

     

    The CA 2002 introduced significant reforms to Tanzanian company law. Its full title alone imparts some of the significance of the act, stating that it is an act to repeal and replace law relating to companies and other associations, to provide for more comprehensive provisions for regulation and control of companies, associations and related matters. The question then is how far reaching are these reforms, and how difficult compliance. The short answer is that the new legislation introduces substantial changes but is intended primarily to clarify existing legislation regarded by many as unclear. Given the intention therefore of the new legislation is simply clarification, compliance should be relatively straightforward. The key reforms brought in by the CA 2002 are as follows.

     

    Directors

    The CA 2002 was drafted and enacted in order to take into consideration developments in corporate governance and directors' duties. Directors previously had various common law duties which have now been enshrined in the CA 2002, and are now statutory duties. These duties include a duty to act in good faith and in the best interests of the company. Given that these were previously common law duties, the practical impact on directors will be minimal though courts will have a greater degree of guidance from the CA 2002 in determining whether directors have breached any of their duties.

     

    In addition, the CA 2002 also imposes a new duty to have regard to the interests of employees, to exercise powers for proper purpose, a duty of care and a minimum age of 21 years for appointment as a director coupled with a duty to disclose one’s age. A director may also find himself personally liable for a company’s debt if he is disqualified from being a director. The CA 2002 also introduces certain prohibitions, including on the making of tax-free payments to directors and/or loans to directors of the company or its holdings company or any connected persons. Lastly, the CA 2002 introduced a statutory procedure for the removal of a director and the requirement that directors’ service contracts be made available for inspection at the company’s registered office.

     

    Capacity of the company to act

    The capacity of a company to act is governed by its memorandum. Previously a company could claim an act was invalid if ultra vires (i.e. outside its authority as stated in its memorandum) and thus would not be liable for such act. The CA 2002 stipulates that it shall no longer be a defence that an act is invalid by reason of limitation of capacity by its memorandum, and this concept is rolled out to acts of directors, i.e. a company will be unable to disclaim liability by reason of a director’s act being ultra vires. Further protection is offered to persons dealing with the company in that they need not enquire into the capacity of the company or authority of its directors and the company would nevertheless be bound by its action. This new legal aspect is aimed at defeating the unscrupulous directors who dealt with the interests of the company at the expense of bona fide third parties. Further, there is a new development in the since that any person dealing with the company has no duty to enquire as to the capacity of company or authority of directors in a certain transaction.

     

    Investigation into a company’s affairs

    The Registrar of companies has the powers to call for information from the company further to which the company has the duty to furnish to the Registrar all the information required by him. On application by its members or the company itself, or on recommendation by a Minister, under the CA 2002 a court may order the investigation of a company if it appears that the company’s affairs have been mismanaged or the law has not complied with in full. This applies equally to local and foreign registered companies. The investigation would be conducted by court appointed inspectors and can potentially be far reaching, depending on the grounds for the order.

     

    Arrangements, compromise, reconstruction and amalgamation

    The CA 2002 introduces the concept of arrangements and reconstruction, which allow a company and its creditors or the company and its members to apply to the court for an arrangement, compromise or reconstruction and amalgamation. In the latter case the new law also provides for how to deal with shares of shareholders dissenting from a scheme approved by the majority.

     

    Minority shareholders

    Minority shareholders are granted additional new protections under the CA 2002, including procedures for orders in cases of unfair prejudice and the institution of derivative actions (i.e. the right of a person to apply to court to prosecute, defend or bring an action in the name of and on behalf of the company or any of its subsidiaries).

     

    Insolvency

    Prior to the CA 2002, when a company became insolvent it went directly to the Court for winding up proceedings. There were three grounds for a winding-up order, including voluntary winding-up, winding-up by the court and winding-up under the supervision of the court. Under the CA 2002 there are only two grounds for winding-up, including voluntary winding-up and winding-up by the Court. Further, under the CA 2002 in the event a company becomes insolvent, it will be able to seek shelter under the new protective insolvency provisions which speak to the proceedings related to company voluntary arrangements with creditors (rescue based approach empowering directors to make proposals), putting a company into administration (court appointed administrators manages the affairs of the company, alternative to liquidation) and receivership (managing the liquidation of a company). The crux of the CA 2002 in this respect is that it affords an orderly and fair process for insolvent companies and their creditors.

     

    The key changes introduced under the CA 2002 for companies operating in Tanzania are indeed largely driven by a recognised need to clarify the existing law, though they do offer additional protection for those dealing with Tanzanian companies, and for the company itself (and indeed for its creditors) in the event it finds itself in financial difficulty.