Company Law Reforms in Tanzania: The Companies Act 2002

Prior to the 1^st 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 1^st 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