A new breed of legal support

Anatomy of the company voluntary arrangement in Tanzania—17

2018-12-09 09:20:22

By Paul Kibuuka @isidoralaw

There is little doubt that businesses in Tanzania have seen tough times in recent years and it is important that we maintain a vibrant and strong private sector to help grow and sustain our economy. Therefore, in this seventeenth part of our ongoing 30-part article series, we explain how the ‘company voluntary arrangement (CVA)’ (also called, a ‘creditors voluntary arrangement’) can help save viable businesses in financial distress.

CVAs are provided for under Part VII Chapter 1 of the Companies Act 2002 (‘CA 2002’) and they are an alternative to appointing an administrator or a liquidator. CVAs are theoretically analogous to the ‘scheme of arrangement’ mechanism that we discussed in the sixteenth part of this series last week; however, the underlying difference is that an insolvency practitioner (a CPA certified by the NBAA or a qualified advocate of the High Court of Tanzania) supervises the implementation of the CVA with minimal court involvement.  

Basically, the board of directors of a company (not under administration or not being wound up) that may make a CVA proposal to the company and its creditors for a composition in the satisfaction of its debts (CVA proposal) as per Section 240(1) of the CA 2002. The proposal may also be made by the administrator when the company enters administration or by the liquidator where the company is being wound up.

Notice of the CVA proposal must be given to the supervisor (insolvency practitioner) who must sign a consent to act and prepare and submit a report to the High Court of Tanzania (‘the Court’) stating whether, in his opinion, meetings of the company and of its creditors should be summoned to consider the proposal, and if yes, the date, time and place he proposes the meetings should take place. The court then files the report and the summoned meetings are held.

A CVA proposal (which can be for rescheduling the debt of a company, or for a debt-equity swap) must be voted for by 75 percent (by value) of creditors to make it binding on all creditors who had notice of the summoned meeting (whether or not they were present or represented at the meeting) as if they were a party to the proposal. In our view, this circumvents problems with creditors who cannot be traced.

Directors need to understand better their duties when the company enters into distress and engage early with the creditors in order to enlist their trust in the CVA proposal, which must show that it is the best course of action for the company and its creditors. Upon approval of the CVA proposal, the supervisor is required to implement and supervise it; failure to implement the proposal may result in the company being wound up.

The right of a secured creditor, such as a bank with a charge or debenture, to enforce its security under a CVA cannot be affected or modified without its consent, but where the Court temporarily suspends creditor legal action, the secured creditor cannot enforce their security without consent of the Court.

Creditors can challenge a CVA by filing an application to Court within 28 days of the creditors’ meeting on the grounds of “unfair prejudice” or “material irregularity”. If the Court is satisfied as to either of the grounds, then it may revoke or suspend the CVA.  

The CVA is not yet a popular tool in rescuing troubled businesses in Tanzania partly because many directors are oblivious to its existence and hence do not reconnoiter the possibility of using it.  Also, while bank creditors want to support their customers, they are typically disinclined to CVAs since the level of compensation CVAs offer is very low and indicative of the maximum amount the corporate debtor is prepared to pay to obtain a release of its obligations under the facility letter and security agreement.

Nonetheless, the benefit of a CVA lies in allowing directors time to restructure a company in financial hardship, which has a chance of recovery and needs some time to become financially stable and pay the creditors. Moreover, a CVA is cheaper than other insolvency procedures, especially since there is minimal court involvement, and this may free up funds for the company and its creditors.

Now here’s a parting shot: Corporate executives in Tanzania should know that creditors will favour more a CVA in which shareholders inject new funds to match their compromises and concessions.

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm. This article was published in The Citizen on Saturday, 8 December 2018

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