The slowing global economy has had an outsize impact on many of Sub-Saharan Africa’s commodity exporting economies including Tanzania (here, recapture the cashew nut conundrum).
In order to rescue Tanzanian firms in financial distress (debt-laden firms), corporate lawyers may consider ‘schemes of arrangement’, which is one of the principal formal mechanisms available for restructuring such firms and the focus of this sixteenth part of our series.
Provided for under Sections 154-156 of the Companies Act 2002 (‘CA 2002’), a scheme of arrangement is a court-approved mechanism by which a financially distressed company may enter into a compromise or arrangement with its members (shareholders) or creditors.
The arrangement includes a re-organization of the share capital of the company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both. Furthermore, a Tanzanian scheme of arrangement can be used to effect the reconstruction of one or more companies or amalgamation of any two or more companies.
Quintessentially, however, the scheme is not an insolvency or bankruptcy process and it attracts low public attention. Moreover, there are no statutorily prescribed grounds; a company in financial distress can enter into the scheme voluntarily.
We believe that the Tanzanian legislature had conscious good intentions for introducing schemes of arrangement into the CA 2002 and provided the company garners the requisite shareholder or creditor support legitimately, the business rescue plan embodied in a particular scheme is likely to succeed, provided that its terms are adhered to.
Whilst the corporate turnaround may seem to be full of promise, ghastly realities, including the indispensable and sensitive question of value of the company’s undertaking or property, are inescapable.
One of the benefits of using a scheme of arrangement is that a company can be liberated from its debt burden and returned to its business activities without the need for external administration of the affairs, business and property of the company.
Other benefits include the ability to avoid bad publicity and loss of goodwill that is common in insolvency procedures; the binding nature of the scheme on all creditors or shareholders within their class or, if the company is being wound up, on the liquidator and contributories, once the High Court of Tanzania (‘the Court’) has sanctioned the scheme; and continuity in the core business of the company.
A major drawback of using a scheme of arrangement is the lack of an automatic temporary suspension of creditor legal action against the scheme company; although we believe that the Court has the power to stay proceedings at its discretion to allow time for the scheme to be put in place.
For a scheme of arrangement in Tanzania to become legally binding, there must be approval from the Court to convene a creditors’ or shareholders’ meeting to vote on the proposed scheme; a meeting of the creditors or shareholders (or either of their classes) in line with the Court’s directions; a majority vote representing three-fourths in value of the creditors or shareholders present and voting in favour of the scheme; the sanctioning of the scheme by the Court once the Court is satisfied that the scheme is fair and reasonable; and the transmission of a certified copy of the Court’s order sanctioning the scheme to the Registrar of Companies for registration failing which the order remains ineffectual.
Unsecured and secured creditors can enforce their security rights under a scheme of arrangement if the scheme approves the enforcement of those rights. A scheme that is supported by a three-fourth majority and sanctioned by the Court can be used to “cram down” creditors or shareholders who do not approve the scheme i.e. imposed over those creditors’ or shareholders’ objections.
Although provided for under the CA 2002 and regulated by, inter alia, the High Court of Tanzania and the Business Registration and Licensing Agency, schemes of arrangement are less prominent in Tanzania, where it is very common for corporate debtors to agree to informal mechanisms with their creditors as a way to circumvent the costs and delays and other drawbacks associated with using the schemes.
Yet corporate Tanzania and the constituency of lenders can draw inspiration from the experiences of other jurisdictions like the UK and Singapore which suggest that, as a restructuring tool, schemes of arrangement can provide an ingenious and positive path to turn the fortunes of debt-laden companies.