Ten Reasons Why the Proposed Article 400A of the Tanzania Companies Act will Discourage Foreign Direct Investment in Tanzania

Shikana Law Group is a corporate law firm in Tanzania, with a special focus on investment into the East African Community, as well as the mining and natural resources sector. Amne Suedi has been practicing for fourteen (14) years, five (5), and a half of which were spent in Tanzania.

The National Assembly is debating various changes to the Written Law (Miscellaneous Amendments) (No 3) Act of 2019 (“the Bill”), brought under a certificate of urgency. The Bill proposes amendments to the Companies Act, amongst other legislation. Section 10 amended the Companies Act through the addition of section 400A. This section provides for the Powers of Registrars to strike off a company registered fraudulently or which conducts business illegally.

The following ten reasons suggest why this will discourage Foreign Direct Investment in Tanzania:

1. Striking off is ordinarily reserved for cases whereby a company is not operational or conducting business. Article 400A proposes that an operational company conducting business may be struck off.
2. The Registrar of Companies’ powers to strike off a company can be exercised on the basis of belief, and not definitive and conclusive evidence, judgment or conviction by a court of law.
3. Fraudulent registration is a reason for a company to be struck off (Section 400A (1) (a)). This contravenes the principle of the “conclusiveness of certificate of incorporation” provided and guaranteed under section 16 (1) of the Companies Act. It follows that a certificate of incorporation issued by the Registrar is conclusive evidence that all registration requirements have been complied with. Essentially, this weakens the value of a certificate of incorporation under the Companies Act of Tanzania.
4. Section 400A (1) (c) proposes that a company can be struck off for “misrepresentation”. This directly contravenes section 472 of the Companies Act which provides that false statements and misrepresentations may constitute an offence punishable by conviction or fine. It does not provide that a company can be struck off due to the extremity of such a procedure and its consequences.
5. Section 400A (1) (b) undermines the authority of the Financial Intelligence Unit established by the Anti-Money Laundering Act of Tanzania. This endangers any investigation or criminal proceedings occurring under this Act. Furthermore, it denies the right to be heard and fair trial through striking off on the grounds of belief.
6. The prohibition on shareholders and Directors to enter the country as a ground for the Registrar to strike off a company denies the freedom of shareholders to appoint new Directors. This may be necessary to allow for constituting a proxy by shareholders, and allow the management of the company to continue. This interferes directly with private company affairs.
7. In striking off a company, the Registrar has no obligation to notify company creditors of claims. Creditors will have no right to object thereto. A restorative process follows should creditors subsequently wish to enforce their rights. If successful, the company will owe interest accumulated from date of strike off. This applies whether or not cause exists as the financial instrument remains valid despite the company being struck off (section 400A (6)).
8. Once Gazetted, a new company may register using the same identity as the company that has been struck off. This negates the right of the struck-off company to be considered for registration again in the case of restoration. A third party may benefit from the brand equity built by the predecessor.
9. Section 400A undermines winding up provisions to protect creditors, partners and shareholders. Such a punitive provision goes against the spirit of the Companies Act and the general principle of good faith in business.
10. Section 400A gives the Registrar of Companies unprecedented powers “to undo” what has taken investors years “to do”. If exercised, this goes against the principle of sanctity of contract as enshrined in the Law of Contract Act of Tanzania.

Shikana Law Group is a corporate law firm in Tanzania which deals with the ins and outs of investing in the East African Community, as well as the mining and natural resources sector. For more information on our services, contact Shikana Law Group today.