Stella Ndikimi and Thomas Sipemba of East African Law Chambers assess the options and framework for parties raising capital in Tanzania
Section 1: Bank licences
1.1 What licences or approvals do lenders need to have if lending to a borrower in this jurisdiction if a) the lender is a bank or b) the lender is a not a bank?
Lenders based outside Tanzania do not require approvals or licences in Tanzania for them to lend to borrowers in Tanzania. A Tanzanian borrower is, however, required to register with the Bank of Tanzania (BoT) their intention to borrow from external sources, in order to obtain a debt record number (DRN) for such borrowing. The DRN is an important reference for the Tanzanian remitting bank when the borrower is repaying the loan, and it is therefore important for lenders to confirm that a Tanzanian borrower has obtained a DRN from the BoT before advancing the financing. A company registered in Tanzania is only able to hold and operate an offshore account if it is held for servicing a loan. Approval of the BoT is also necessary if the arrangement involves a borrower opening an account outside Tanzania.
However, foreign lenders are required to generally comply with the laws relating to money laundering as provided under the Anti-Money Laundering Act 2006 (Act 12 of 2006) and the Foreign Exchange Act, chapter 271 (Revised Edition, 2002).
1.2 Are any exemptions available and/or are any techniques typically used to structure around such requirements?
No.
Section 2: Security interests
2.1 Can security be taken over the following asset classes and what documentation or formalities are required to create, perfect and maintain such security?
a) shares
b) bank accounts
c) receivables
d) contractual rights
e) insurance policies
f) real property
g) plant and machinery
h) intellectual property
i) debt securities
j) future/after acquired property
k) floating charges over all assets
Yes, security can be taken over all the above listed asset classes. The documentation that often creates such security is a mortgage (over real property, and other immoveable assets of a company), a debenture (often creates a fixed or floating charge over the assets of a company), a pledge (often over shares and debt securities), a guarantee, an assignment or an indemnity.
To perfect security issued by a company, the charge must be registered with the Registrar of Companies within 42 days of the date of creation of the security in accordance with the provisions of Section 96 of the Companies Act, 2002 (Companies Act).
It is now becoming common practice for borrowers and guarantors to pledge shares to lenders, a share pledge remains equitable until the transfer of shares has been registered. A pledge is a form of possessory security available under the Law of Contract Act. If the financial instruments are evidenced by certificates, the certificates should be delivered to the lender with the relevant resolutions and transfer forms to perfect the security.
Security over claims and receivables is generally created by way of assignment. In the case of a company, the assignment must be registered in accordance with Section 96 of the Companies Act to ensure perfection.
Another option in taking security over claims and receivables is by cession of the security. With this option, there are no specific perfection requirements as the act of cession itself is sufficient to perfect the security.
Mortgages over land have to be registered with the Registrar of Titles after they have been registered with the Registrar of Companies. A consent from the commissioner for lands must be obtained after a mortgage has been registered with the registrar of companies, and before it is registered with the registrar of titles.
A mortgage in respect of matrimonial property would require that spousal consent is obtained. A mortgagee (or lender) cannot foreclose on the property and have it sold in execution without having regard to the mortgagor's rights of equitable redemption. The Land Act, chapter 113 [RE] 2002 does not provide any specific procedure relating to equitable redemption and traditionally all that is required is for the mortgagor to repay the advanced facility or to make good the default. A court order must be obtained when enforcing security over immovable property where such property is: (i) a dwelling house; (ii) any land in actual use for agricultural purposes; (iii) any land in actual use for pastoral purposes; or, (iv) any land where taking physical possession peaceably is not possible.
The most common form of security that can be granted over movable property under Tanzanian law is a pledge, which is a type of mortgage given by a debtor (pledgor) in favour of a creditor (pledgee) as security for a debt or other obligation. The title to the movable property remains with the pledgor, subject to the security interest of the pledge.
Other modes of taking security over moveable property which are common under Tanzanian law include cession of security, which is a way of granting security over incorporeal or intangible movable property. A cession is created by agreement and must be registered within 42 days of the date of creation in accordance with the provisions of Section 96 of the Companies Act.
Security over intellectual property is not generally very common, even though it is permitted under Tanzanian law. Rights on intellectual property can only be enforced if it has been registered, so security cannot be created and perfected over unregistered intellectual property. An unregistered interest takes effect only as an equitable interest, which is difficult to enforce.
For registered intellectual property, security can be granted by the creation of a fixed or floating charge. The document creating the charge must be registered within 42 days under the requirements of Section 96 of the Companies Act.
In insolvency situations, preferential debts such as government taxes and rents, outstanding wages and salaries, or compensation due to employees take priority over all other claims, including claims made by holders of floating charges over the company's assets.
Under the laws of mainland Tanzania, no taxes are payable in connection with the granting and enforcement of security or granting a loan, save for the nominal registration fees (approximately $25) and stamp duty (approximately $5) payable for the registration of security documents. Where enforcement of security requires obtaining a court order entitling the lender to enforce the security, court fees are payable.
2.2 Highlight any issues with securing obligations that may arise in the future.
Under Tanzanian law, rights to future assets can be granted as security mainly in the form of a floating charge. For immovable assets, validity and enforcement of the security may be challenged on the basis that the pledgor did not have title over the asset at the time of creating the security.
As with security over future immovable assets, the creation of security over fungible assets (a pool of assets indistinguishable from each other which may change over time) is difficult, as it does not confer viable security interests on the pledgee unless charged by way of a floating charge. In this case, the charged assets are determined at the time of crystallisation.
2.3 Can a universal security agreement be used to grant security over all assets in this jurisdiction?
Yes, a floating charge is a universal security agreement that can be used to grant security over all of a borrower's assets in Tanzania.
2.4 Can security be granted for the benefit of different classes of creditors under the same security agreement and if so, are there any issues that creditors should be aware of in adopting this approach?
There is no prohibition against granting security to different classes of creditors through the same security agreement. If this were to happen, creditors are advised to ensure that the security agreement undergoes thorough review to confirm ranking of the creditors and enforceability of the security before the agreement is finalised. It is also advisable for the creditors to also sign an intercreditor or security sharing agreement between them.
2.5 Can security trustee or security agent structures be used in this jurisdiction to secure obligations that are owed to fluctuating creditor classes?
Yes. Creditors must conclude an agreement appointing the security agent.
2.6 Briefly outline any issues to consider when transferring loans and accompanying security interests between lenders.
Loans can be transferred from one lender to another. It is important, however, to ensure that the loan documents permit such transferability. In most cases, loan documents prohibit the transferring of the loan obligations on the part of the borrower. Issues to consider when transferring loans and accompanying security interests between lenders include whether the provisions of the loan documents permit such transferability, appropriate cancellation of the transferor's interests in the security, appropriate registration of the transfer instrument and the new security holder's interests and payment of any due stamp duties and registration fees.
2.7 Can security be granted by third parties? Are there any rights of contribution, subrogation or similar that might arise as a result of granting/enforcing third party security that ought to be/can be waived?
Yes, it is possible for third party to grant security in favour of a lender to secure the debt of another party (the borrower). Before enforcing security against a third party, the lender must first exhaust its remedies against the principal borrower.
2.8 Briefly outline the registration requirements, if any, applicable to security interests created in this jurisdiction, including considerations such as the timing, expense and the consequences of non-registration.
For requirements and expenses relating to the registration of security interests, please refer to 2.1.
The registration of security documents with the Registrar of Companies takes approximately seven working days. The process of registration of a mortgage over land is more complex, and takes approximately 21 working days, depending on the location of the land subject to the mortgage.
2.9 Briefly outline any regulatory or similar consents that are required to create security (other than board/shareholder approvals).
The regulatory approvals to be obtained in creation of security largely depend on the nature of the security asset. Certain assets within regulated sectors would require consent from the regulator, for example mineral rights and telecommunication licences or shares held in a telecommunications company. In the case of land, consent from the commissioner for lands must be obtained in registering a mortgage over land. Consent of the commissioner for minerals is also required in creating a mortgage over land in which exploration for oil and gas is taking place.
Section 3 – Guarantees
3.1 Briefly explain the downstream, upstream and cross-stream guarantees available, with reference to any particular restrictions or limitations.
There are no specific restrictions on the issuance of downstream, upstream and cross-stream guarantees. Like other contracts, inter-corporate guaranties must be supported by consideration and in this case, any consideration would suffice to support the guarantees. Consideration moving directly to the guarantor is not essential, and the consideration need not move only between the lender and the guarantor.
3.2 What regulatory or other consents are required to grant downstream, upstream and cross-stream guarantees (other than board/shareholder approvals)?
None.
3.3 Briefly outline any enforceability concerns associated with the granting of downstream, upstream and cross-stream guarantees that lenders should be aware of (eg any exchange controls or similar obstacles).
None.
Section 4 – Enforcement
4.1 Do the local courts generally recognise and enforce foreign-law governed contracts?
Yes, Tanzania courts will generally recognise foreign-law governed contracts provided that their provisions do not contravene any written law or public policy in force in Tanzania.
4.2 Will the local courts generally recognise and enforce a foreign judgment that is given against a domestic company in foreign courts (particularly the New York or English courts) without re-examining the merits of the decision?
Where judgment is obtained from a foreign jurisdiction, it can only be enforced in Tanzania if the country from which the judgment has been obtained has a reciprocal arrangement for enforcement of foreign judgments with Tanzania. Unless this condition is met Tanzanian courts would not enforce any judgment given by a court of any other jurisdiction.
4.3 Will the local courts recognise and enforce an arbitral award given against the company without re-examining the merits of the decision?
Yes, local courts would normally enforce an arbitral award without re-examining the merits of the decision. For enforcement to happen however the arbitral award must be registered in Tanzania, after which it becomes enforceable and can be enforced as a decree of the High Court.
4.4 When enforcing security, what factors significantly impact the time such enforcement takes and the value of the proceeds received from such enforcement? For example, are there any statutory requirements such as (a) holding a public auction; (b) court involvement; or (c) obtaining regulatory consents?
The Land (Amendment) Act requires the mortgagee to serve upon the mortgagor a 30-day notice notifying the mortgagee where there is a default in the payment of any interest or any other payment, or in the fulfilment of any condition secured by the mortgage or in the performance or observation of any covenant.
Where the mortgagee chooses to take possession, the mortgagee or the receiver is required to obtain a court order before taking possession of a mortgaged property if it is a dwelling house in which any person is in residence, the mortgaged land is in actual use for agricultural or pastoral purposes or where the taking of physical possession peaceably is not possible.
Selling the mortgaged property may be by way of public or private auction. By public auction, the mortgagee or receiver must ensure that the sale is publicly advertised. The mortgagee or receiver must also ensure that the mortgaged land is not sold at 25% or more below the average price at which comparable interests in land of the same character and quality are being sold in the open market. This calls for the mortgagee to ensure that a proper valuation of the property is done before the sale in order to ensure compliance.
Where the security interest to be realised is contained in a debenture, the debenture must afford the debenture holder a number of ways of realising the security held in the event that any of the events of default occur and the securities become enforceable. Such powers that are vested on the debenture holder include the power to sue the mortgagor to recover the secured liabilities, appoint an administrative receiver, appoint a fixed charge receiver or obtain administration orders against the company. There are no specified procedures so the procedure of enforcement is dictated by the debenture instrument. This also applies when enforcing a pledge of shares.
4.5 Are there any restrictions that apply specifically to foreign lenders when taking enforcement action?
No. Under Tanzania law, a secured lender can generally enforce its security following the occurrence of default or an event of default of either the principal obligation or any other obligations under the finance documents.
Section 5 – Bankruptcy and insolvency proceedings
5.1 Briefly outline the main bankruptcy/insolvency processes in this jurisdiction, including any control or influence that creditors can exert on the process, the timeframes usually involved and any mandatory filing requirements.
Insolvency proceedings are generally governed by the Companies Act and the Companies (Insolvency) Rules 2005. The insolvency process includes the appointment of receiver managers, administrative receivers or liquidators. The appointment of a receiver and manager allows the creditor to seize the assets of debtor out of court proceedings. A receiver and manager can be appointed by a creditor under the terms of the security instrument such as the debenture or the mortgage. The law allows for the appointment of an administrative receiver to ensure that a business is sold as a going concern. Like the receiver and manager procedure, administrative receivership also allows the creditor to seize the assets of the debtor in out of court proceedings.
The Companies Act also allows for companies to enter into voluntary arrangements whereby a scheme is effected with minimal involvement by the court. The principal feature of this procedure is that a voluntary arrangement must be voted upon by creditors and must be reviewed, endorsed and administered by an insolvency practitioner.
A scheme of arrangement is also allowable under the Companies Act if a compromise or arrangement is proposed between a company and its members or creditors, or any class of them and is approved by a representing 75% and subsequently sanctioned by the court.
5.2 Are there any preference, fraudulent conveyance, clawback, hardening periods or similar issues or preferential creditor rights that lenders should be aware of?
Yes. The enforceability of securities and contracts may be limited by the provisions of the Companies Act and the Companies (Insolvency) Rules 2005. In particular, where a company enters into a contract with any person at under value within a period of two years before the commencement of winding up or administration transactions, the liquidator or administrator may apply to the court to make such a contract voidable. A transaction is considered to have been made at under value if the company receives no consideration or where the consideration provided is significantly less than the consideration provided by the company. Further, a company that enters into any transaction giving preference to a creditor within six months of the commencement of insolvency or administration may be declared voidable, thus restoring the parties to the same position that they would have been had the company not granted such preference. A floating charge created within 12 months from the commencement of winding up a company is invalid, unless it is proved that the company was solvent immediately after creating the floating charge.
5.3 Do bankruptcy/insolvency processes provide for any kind of stay/moratorium on enforcement of lender claims? If so, does the stay/moratorium apply to the enforcement of security interests?
In insolvency situations, preferential debts such as government taxes and rents, outstanding wages and salaries, or compensation due to employees take priority over all other claims, including claims made by holders of floating charges over the company's assets.
Section 6: Your jurisdiction
6.1 In no more than 200 words, outline any cross-border financing trends specific to your jurisdiction.
Tanzania has, over recent years, seen increased activity in cross-border financing transactions. A considerable number of multinational banks and companies have been establishing businesses in Tanzania, thus making cross-border financing inevitable. Banks such as the South African Standard Bank, the United Bank of Africa and European banks such as Standard Chartered and BNP Paribas continue to be active across large parts of Africa, including Tanzania.
Increased activities in mergers and acquisitions and greenfield entries have boosted cross-border finance transactions with financiers. Tanzania has also has also been pinpointed as having significant amounts of unexplored but highly potential sedimentary basins of natural gas and this has presented opportunities for financiers to extend lending activities to companies within the oil and gas industry. Tanzania boasts a fairly stable political environment, which remains an attraction to lenders and investors alike, thus promoting cross-border activity in the country.
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Stella Ndikimi
East African Law Chambers
Dar Es Salaam
About the author
Stella Ndikimi is the managing partner at East African Law Chambers, and a former partner of Ishengoma Karume Masha & Magai Advocates (IMMMA Advocates). She is a full time legal practitioner, practising as an Advocate of the High Court of Tanzania. Stella specialises in banking, corporate and financial laws, and has immense experience in corporate law matters, including corporate finance, mergers and acquisitions and insolvency laws.
Stella has handled notable mandates and together with the firm's corporate law team advises banks and financial institutions on financing, recovery, insurance, and general corporate matters. She is qualified to practice law both in Tanzania and in Zanzibar, and is an active member of the Tanganyika Law Society and the East African Law Society.
Thomas Sipemba
East African Law Chambers
Dar Es Salaam
About the author
Thomas Sipemba is a partner at EALC, a former partner at Ishengoma Karume Masha & Magai Advocates (IMMMA Advocates), and former legal counsel for Barrick Gold Tanzania (now Acacia Mining). He specialises in corporate and commercial law, mining and environmental laws, and infrastructure law. He has special interest in natural resources laws, including energy, oil and gas and land laws.
Thomas has provided advice to a number of mining companies on matters such as administrative actions by the regulators, and modalities of acquiring mineral rights and other concessions. He also engages in litigation, and represents clients on procurement matters. He is qualified to practice both in Tanzania and Zanzibar and is an active member of the bar associations of East Africa, Tanzania and Zanzibar.