August 6, 2019

CORPORATE LAW UPDATE: WHAT COMPANIES AND THEIR MANAGEMENTS NEED TO KNOW REGARDING CHANGES TO THE COMPANIES LAW IN TANZANIA

Amendment of a definition of a Company
Mandatory conversion of a Companies Limited by Guarantee (CLGs) with no share capital into Non-Governmental Organizations
Striking off of Companies limited by guarantee with no share capital off the Companies Register with the Business Registration and Licensing Authority (BRELA)
Extension of powers of the Registrar of Companies’ to strike off companies from the register
Curtailing registration of companies without the word “Limited

1.0 Introduction

Following a publication of a Bill on Written Laws (Miscellaneous Amendments) (No.3), 2019 back in May, 2019 which amended a variety of laws including The Companies Act no. 12 of 2002 and later an enactment of the Bill into an Act i.e. Written Laws (Miscellaneous Amendments) (No.3) Act, 2019, there are amendments that have affected operations of companies and future registration of certain type of companies in the United Republic of Tanzania.

Our, Breakthrough Attorneys’ Corporate Secretarial department, through this Article move to shed a light on the amendments done to the Companies Act and what will be the resulting effects to existing companies and forthcoming ones. Moreover, the Article discusses the much debatable and to many, inacceptable, extension of the Registrar’s power to strike off companies

2.0 Discussion of the Amendments made to the Companies Act:

a) Amendment of a definition of a Company

Prior to the Written Laws (Miscellaneous Amendments) (No.3) Act, 2019, a Company was defined simply as a company formed and registered under this Act or an existing company. This definition what a company is has been amended to a more extensive definition, which explains what will be considered as a company under the Companies Act. Specifically, Section 4 of the Act now defines a company to mean a company formed and registered under this Act (the Companies Act) or an existing company established for investment, trade or commercial activities and any other activity as the Minister may, by notice published in the Gazette, prescribe. The Act further defines what commercial activities, investment activities and trade entails. According to the Act, these activities include the following;

all activities of industry and trade, including, but not limited to, the buying or selling of commodities and activities conducted for the purpose of facilitating such buying and selling;
transactions involving sale or purchase of equipment plants, properties, securities, capital, stocks, debentures or other assets generally not held for immediate re-sale and any other activity as the Minister may, by notice published in the Gazette, prescribe
the transfer of goods or services from one person or entity to another.

This means that, companies whose activities fall under the purview of the above-listed activities including companies limited by guarantee shall remain to fall under the Regulation of the Companies Act. In hindsight this specific definition may create a problem when activities may seem to fall outside of the scope of the definition. In our opinion, specificity may lead to narrowing the scope and possibly, absurdity of application. One may say the Minister has powers to widen the scope, but that is an administrative process and it is inevitable how that usually goes.

b) Mandatory Conversion of a Company Limited by Guarantee with no share capital into Non-Governmental Organization (NGO)

The Act has also amended the Companies Act by adding a provision to the effect of obliging companies that were registered under the Companies Act as companies limited by guarantee with no share capital and possessing a certificate of compliance from the Non-Governmental Organization Act to be mandatorily converted into NGO’s and fall under the purview of the Non-Governmental Organization Act. The Act has further provided that, these companies will be deemed as registered under the NGO Act and should be struck off the Register of Companies. The Written Laws (Miscellaneous Amendments) (No.3) Act, 2019 has gone further in this to remove certain activities, which are NGO in nature, which were allowed under S. 32 of the Act.

For more guidance into this please read our full-scale article regarding what NGOs, which were registered as CLGs, need to do here.

c) Striking off of Companies limited by guarantee with no share capital off the Companies Register with the Business Registration and Licensing Authority (BRELA)

The Registrar of Companies is obligated to strike off the companies register all companies, which were previously registered as limited by guarantee without a share capital. The exercise of striking off is supposed to be done within two months from 1^st July 2019 when the amendments to the Companies Act came into operation.

d) Extension of Powers of the Registrar of Companies’ to strike off companies

Prior to coming into operation of this amending Act, the Registrar of companies had power to strike off a company of a register of companies if he has reasonable cause to believe that a company is not carrying on business or in operation upon sending prior notice to the company enquiring on whether the company is carrying on business or in operation.

This new Act has further expanded those powers of the Registrar of companies in which he/she may base in exercising the mandate to strike off companies. Specifically, this has been done by adding a new provision in the Companies Act i.e. Section 400A, which has provided that the company may be stricken off by the Registrar if;

a registered company has been fraudulently registered;
a registered company is engaged in criminal activities such as money laundering, human trafficking, drug trafficking; terrorism financing or any other offence punishable by law;
at the time of incorporation, there was misrepresentation or fraud by a registered company;
by operation of law, all shareholders or directors have been prohibited from entering the country;
a registered company is operating contrary to its objectives as prescribed in the memorandum and articles of association

This provision has given immense power to the Registrar as the Registrar can strike off following a prior notice sent to the company of his intention to strike off the company. From interpretation of this provision, unlike in the previous position on striking offs; the company is not given an opportunity to defend itself, as the notice by the Registrar is not an enquiry notice, which attracts a reply, by the company rebutting or explaining the situation.

One would say that the powers of the Registrar are unfettered and likely to turn into abuse. The Registrar in this scenario acts as the complainant, investigator, prosecutor, judge, jury and executor. Most of the factors mentioned are subject of immense investigation, and some are even criminal in nature. There are agencies, which deal with fraud and allied issues, and it would seem that the Registrar, an individual from the Company registry, is given powers concurrent and capable of interfering or rendering irrelevant, the role of other authorities. It could have been more viable, if the Registrar was to seek a report of the other authorities in such matters before striking off a company on his own whim and discourse.

e) Restriction on registration of companies without the word “Limited”

The Act has put much restriction on registration of companies without the word “Limited” by cutting down number of activities that entitled a company to be registered dispensing the word “Limited” in its company name. Prior to these amendments in the Companies Act, the Registrar could register and dispense the word “Limited” on a company’s name for those companies that are registered for purpose of promoting commerce, art, science, education, religion, charity or any other useful or social object, and intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members.

The amendments to the Companies Act has amended the power of dispensing with the word limited only to companies which intends to promote commerce only and intending to prohibit payment of dividends to its members. Before these changes, other companies formed for the purposes of promoting activities such as art, education, culture, charity etc. were also amenable to operate without the word Limited in their title. Now the amendment to S. 32 of the Companies Act has scrapped off all these activities and only retained “commerce”.

3.0 Conclusion

The Written Laws (Miscellaneous Amendments) (No.3) Act, 2019 has brought many changes on existing companies and prospective companies to be registered in Tanzania. The Act has vested much power on the Registrar of companies to strike off companies off the registrar based on reasonable cause without affording the opportunity to the affected company defending itself. Further, the amendments marks a great reform on companies limited by guarantees without a share capital as it changes the nature of the entities into NGOs.

For us at Breakthrough Attorneys, digesting and analyzing these changes in line with the commercial and investment competitiveness is key. What we see is that the amendments may affect our investment attractiveness and subsequently, flow of FDI due to the following reasons:-

Powers of the Registrar may be used arbitrarily.
There is now uncertainty to companies’ status as one can be stricken off the registrar in a whiff of a second and lose all.
Reversal of the doctrine of separate personality between company and its shareholders. This is usually a last resort option and done judiciously after extensive consideration to pierce the veil of the distinct personality. For seamless flowing of FDI and investment, culminating into dividend and income to the shareholders, a protection through differentiation between the shareholders and the company is key. These amendments are threatening this differentiation and in essence, threatening the appetite of investors to invest in Tanzania if issues and problems of a shareholder can visit the company and vice versa.

It is thus our humble opinion that the powers extended under S. 400A be reviewed and revisited to ensure that our country sits in a paramount position when it comes to attracting inward investment. It is important that we should not restrict our regulatory compliance aspects while more and more competitors are relaxing terms and regulations so as to gain competitive edge.

Important Notice:

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Breakthrough Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.