COMPANY LAW UPDATE: RESPONSIBILITIES AND LIABILITIES OF DIRECTORS OF A COMPANY IN TANZANIA
- General responsibilities of directors of a company.
- Executive vs. Non-Executive Directors
- General liabilities of directors of a company
- Liabilities of directors of a company during liquidation
- Liabilities of directors in actions brought against the company by creditors
The essence of a Company is that it has a legal personality distinct from the people who compose it, that is, the people who have subscribed for shares in the Company or have given guarantees to the company and from the directors of the company. The concept of separate legal personality was expounded in the case of Salomon v. Salomon  AC 22 where it was held that;
“A company is an independent person with its rights and liabilities appropriate to itself, and that “the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.”
In essence therefore, if a company in the course of doing business is involved in any legal action that imposes any liabilities on the company; the company shall be sued in its own capacity as an entity.
Though the case above makes no mention of exclusion of directors from the liabilities of the company, the applicability extends to cover the actions of directors when discharging their duties to the company. This means that, as a general rule a director cannot be personally liable for the company’s liabilities, as seen herein below.
1.1 Corporate veil; A wall that separates Directors and Shareholders from General Company Liabilities
However, there are instances in which the corporate legal personality may be lifted by the Court in case the directors or members of the company seek to avoid legal obligations or perpetrate improper conduct under the name of the company. In Tanzania, the principle of lifting the corporate veil was established in the case of Yusuf Manji v. Edward Masanja &Another, Civil Appeal No. 78 of 2002 where the Court of Appeal held that it would serve the best interests of justice to lift the corporate veil and hold the directors of the company liable where it is apparent that the directors were concealing assets of the company in their own names.
The Corporate and Commercial Department of Breakthrough Attorneys has prepared this thorough summary regarding general responsibilities and liabilities of directors of a company under the Companies Act No. 12 of 2002 of Tanzania.
2.0 Executive and Non-executive directors
2.1 Executive Directors
Executive directors are employees of the company. They have a thorough knowledge of the company and they manage the day-to-day operations. In basic terms, the executive directors run the company and deal with the preparation of and implementation of the strategic plans and business plans of the company. Because they work within the company on a daily basis, it is up to them to keep the rest of the board updated on the activities of the company.
2.2 Non-executive Directors
The non-executive directors do not have executive responsibilities and generally focus on board matters. They are not involved in the day-to-day running of the company, and generally have an objective and more independent perspective of the business. These are the focus of this Article.
Non-executive directors are appointed to the Board of a company to make changes and give advice. Not only are they responsible for assessing the effectiveness of management, but they also examine the financial statements and assess any risks. They also set strategic aims for the company to increase revenue, create relationships with other organizations, and improve the public image. It is advised that non-executive directors should remain separate from shareholders and others who have high stakes in the company
A clear delineated company structure should enable the Non-Executive Directors to assist the management with their objective and impartial views whilst the executive directors deal with the day to day management of the company. The skills of the board members should be carefully and regularly reviewed and analyzed to ensure that optimal performance is achieved. This Article focuses on those Directors who sit on the Board of Directors and not the ones who run the company from day to day.
3.0 General Responsibilities of Directors of a Company
The Companies Act imposes the following general responsibilities upon directors of a Company;
3.1 Management of a Company
It is the responsibility of Directors to manage the company in accordance with section 181 of the Act. As per Clause 2.1 above, the management of the company via Directors is done through meetings of the Board of Directors. The function of the Board of Directors of is to manage, represent and supervise, as may be necessary, so as to ensure that the company fulfils its corporate objectives, while seeking to protect the company’s general interests and create value for the benefit of all the shareholders.
3.2 Duty to act in good faith
Section 182 (1) of the Act places a responsibility upon directors of a company to act honestly, in good faith and in the best interests of the company when exercising powers or performing duties.
3.3 Duty to have regard of the interests of employees of the Company
The matters to which the directors of the company are to have regard in the performance of their functions include, in addition to the interests of the members, the interests of the company’s employees (Section 183(1)).
3.4 Duty to exercise powers for proper purposes
It is the responsibility of directors of a company to exercise the powers conferred to them for proper purposes alone and not otherwise (Section 184).
3.5 Duty of care, skill and diligence
Section 185 of the Companies Act provides that a director owes the company a duty to exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both:
3.5.1 The knowledge and experience that may reasonably be expected of a person in the same position as the director, and
3.5.2 Any special knowledge and experience which the director has.
3.6 Duty to obtain share qualification
Section 191(1) of the Companies Act states that it shall be the duty of every director who is by the Articles of the company required to hold a specified share qualification, and who is not already qualified, to obtain his qualification within two months after his appointment, or such shorter time as may be fixed by the Articles.
3.7 Duty to disclose age
It shall be the duty of any person who is appointed or to his knowledge proposed to be appointed director of a company to give notice of his age to the company at a time before he/she has attained the minimum age (21 years) required to qualify as a director or after he/she attained any retiring age applicable to him as director either under the Act or under the company’s Articles of Association.
3.8 Duty to disclose payment for loss of office made in connection with transfer of shares
Section 203(1) imposes a duty upon directors of a company to take all reasonable steps to secure that particulars with respect to the proposed payment in connection with the transfer to any persons of all or any of the shares in a company including the amount thereof shall be included or sent with any notice of the offer made for their shares which is given to any shareholders. Failure to adhere to this shall result to payment of fine in accordance with section 203(3).
3.9 Duty to make disclosures to the company
It shall be the duty of any director of a company to give notice to the company of such matters relating to himself as may be necessary for the purposes of sections 205, 206 and 207 of the Companies Act with respect to directors’ shareholding, particulars in accounts of directors regarding salaries and pensions and particulars on loans.
3.10 Duty to avoid conflict of interests
Directors of a company have the responsibility to disclose their interests where he or any connected person is in any way whether directly or indirectly, interested in a contract or proposed contract with the company at a meeting of the directors of the company [Section 209(1)].
4.0 Liabilities of directors of a company
4.1 General liabilities
4.1.1 Liability in respect of reduced shares
Directors of a company shall be liable where reduction in the capital of the company is not effected in accordance with the sections 69 – 70 of the Act (Section 72)
4.1.2 Liability of un-discharged bankrupts acting as directors
If any person who has been declared bankrupt or insolvent by a competent Court in Tanzania or elsewhere and has not received his discharge acts as director of a company without the leave of the Court, he/she shall be liable on conviction to imprisonment or to a fine or to both [Section 196(1)].
4.1.3 Liability for acting against a disqualification order of the Court
If a director is a convicted of an offence regarding the management of the company in his capacity as a director and orders were issued to disqualify him as a director then he shall not enter into any obligation or arrangement on behalf of the company. If at all the director subject to disqualification enters into a liability on behalf of the company, then, such person (director) shall be personally liable for all relevant debts of the company [Section 198(1)]
4.1.4 Liability for contracts entered into on behalf of the company prior to its incorporation
If a director enters into a contract on behalf of the company prior to the incorporation of the company, he/she shall be personally liable for the contract subject to any agreement to the contrary [Section 40(1)].
4.1.5 Tax liabilities in instances of tax avoidance by the company
The Court may hold directors personally liable for the tax liabilities of the company where it is determined that the directors used the company for deliberate tax avoidance.
The Commissioner General of the Tanzania Revenue Authority may order jeopardy assessment to be undertaken if he is of the view that there is a threat of non-payment of the Government revenue due to concealment of the documents or records of the company by directors of the company [Section 98 (1) (a) of the Income Tax Act, 2004 and Section 77 (1) of the Tax Administration Act, 2015].
4.2 Liabilities during liquidation
A director of a company shall be liable during the course of liquidation if it appears that that he/she has misapplied or retained or become accountable for any money or other property of the company. The Director shall also be liable if he/she is guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company (Section 382 of the Companies Act).
The liquidator may in the course of winding up, apply to the Court for a declaration that any persons (including directors) who were knowingly parties to the carrying on of the business in the manner that intends to defraud creditors or for a fraudulent purpose are liable to make such contributions to the company’s assets as the Court thinks just [Section 383(1)].
Where directors is found to be guilty (during liquidation) for carrying on business for fraudulent purposes, they shall be liable to;
4.2.1 Repayment of money or contribution to the assets of the company by way of compensation in respect of a misfeasance or breach of any fiduciary or other duty after an application is made to the Court by a liquidator
4.2.2 Make contributions towards the company’s assets during liquidation where the Court determines that any business of the company has been carried on with intent to defraud creditors or for fraudulent purposes.
4.2.3 Make contributions towards the company’s assets during liquidation where the Court determines that the directors engaged in wrongful trading.
4.3 Liabilities in actions brought against the company by creditors
Section 382 (3) states that the court may, on the application of the official receiver or the liquidator, or of any creditor examine into the conduct of the directors regarding the usage of money from creditors and compel him/her to repay or contribute such sum to the company’s assets by way of compensation in respect of the misfeasance or breach of any fiduciary or other duty as the Court thinks just.
Moreover, section 383(1) provides that if in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, the liquidator may apply to Court for an order against such director who was knowingly a party in carrying on of such business to be liable to make such contributions to the company’s assets as the Court thinks just.
5.0 Indemnification of Directors
Directors of a company may be indemnified in respect of any acts committed in their capacity as directors during their discharge of duties. The indemnification clause is usually inserted in the Articles of Association of the company.
The Articles of Association of a company must contain a clause regarding the indemnity enjoyed by Directors incase their actions, on behalf of the company, exposes them in some sort of a liability. Under the Act, indemnification of directors is provided for under Table A in the schedule. This is the clause that would be adopted in case a company prefers the templated version of Articles of Association offered by the Act. The indemnification clause states that;
“without prejudice to any indemnity to which a director may otherwise be entitled, every director or other officer or auditor of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application under section 481 of the Act in which relief is granted to him by the court from liability for negligence, default, breach of duty or breach of trust in relation to the affairs of the company”.
The Corporate and Commercial Department at Breakthrough Attorneys urges strict compliance to the responsibilities imposed upon directors of a company under the Companies Act. The actions of directors should always be above/beyond reproach with regards to the interests of the company and its creditors.
Despite the separate legal personality that a company may enjoy under the law, there are instances that may warrant the Court to pierce the corporate veil and hold directors personally liable where their actions serve to defraud creditors, to escape legal obligations, evade tax, determination of character of a company, protection of public policy and statutory lifting.
This publication has been prepared for information purposes only, and it 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.