Company Law Reforms in Tanzania: The Companies Act 2002

Filed in Articles by on July 24, 2013 0 Comments

Prior to the 1st of March, 2006, 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 that the intention 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.

 


For more information, feel free to contact any of the persons listed below at the

Dar es Salaam

office of FK Law Chambers.

Krista
van Winkelhof (UK Qualified Solicitor / Lawyer),

Dar es Salaam

 

Email:
krista_vanwinkelhof@shadboltlaw.com

 

Professor Luoga, F.D.A.M.,
Dar es Salaam

 

Email:
luoga@fklawchambers.net

 

Laswai,
J. I. K,.

Dar es Salaam

 

Email:
laswai@fklawchambers.net

 

FK
Law Chambers in association with Shadbolt & Co LLP

 

+255 (0) 22 212 2029 / 31 / 32

About the Author ()

© Krista van Winkelhof, 2006 All rights reserved Krista van Winkelhof is a UK Qualified Solicitor/Lawyer, practicing with Shadbolts and FK Law Chambers. See our listing under Tanzania Law Firms  

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