As a precursor to this sixth part of our ongoing 30-part article series, we discussed the documentation and perfection of consensual security interests (part 3), the requirement for obtaining the approval of the Commissioner for Lands (part 4), and the fixed/floating charge distinction and its ramifications (part 5). Now, as it will not usually be suitable for a bank to take security over all the assets of a corporate borrower, we provide an overview of the specific assets over which security can be taken in Tanzania.
Security over land is preferably taken by way of legal mortgage. To mortgage a matrimonial property, spousal consent must be obtained in accordance with Section 114 of the Land Act, 1999. Recently, this Act was amended by the Written Laws (Miscellaneous Amendments) Act No.1 of 2018 to allow, as security for a loan, a mortgage of land held under a granted right of occupancy to a foreign financial institution.
Shares in Tanzanian companies, particularly DSE-listed companies, are increasingly being accepted as collateral security created by way of a pledge or fixed charge. A share pledge remains equitable until the transfer of shares has been registered. For DSE-listed companies, it is important to consider notification requirements; in addition, to restrictions, if any, in the company’s “memarts”, such as pre-emption rights.
Security can be taken over cash deposits in bank accounts by a fixed or floating charge. A fixed charge over a bank account is mostly effective if the bank account is blocked so that the borrower (chargor) can withdraw funds with the permission of the bank (chargee). A floating charge allows the borrower to deal with the account in the ordinary course until a default is triggered.
The most common form of security granted over plant, machinery and equipment is a pledge where possessory title to such property remains with the corporate borrower (pledger) subject, of course, to the security interest of the pledge. Alternative, security can be created over plant, machinery and equipment by way of a fixed charge.
With regard to inventories held for the ultimate goal of resale, due to their floating nature, a floating charge would be a better security.
Special assets, for example, ships and aircrafts can be collateralized but under special rules. A security interest in aircraft is recorded in the certificate of registration issued by the Tanzania Civil Aviation Authority and registered at the International Registry of Mobile Assets and the Tanzanian registry of companies, if the borrower (chargor) is a company registered in Tanzania. For ships, registration of the security interest at the newly formed Tanzania Shipping Agencies Corporation is recommendable.
Moreover, restrictive regimes apply to the creation of security interests over assets in certain regulated sectors of the Tanzanian economy; to wit, mining, telecoms and insurance.
Security can be created over contractual rights and insurance policies by way of a fixed charge and floating charge, or assignment, as long as there is no clause in the underlying contract prohibiting the creation of security. The counterparty in that contract must be notified of the security interest being created; in respect of insurance proceeds, notice must be given to the pertinent insurer.
Accounts receivable are very attractive to lending banks because they are just a step away from cash. Security over receivables can be created by way of assignment or cessation. A third party is requested to acknowledge the notice of assignment; however, the lack of acknowledgement does not invalidate the assignment. A fixed or floating charge can also be created over receivables.
Taking security over trademarks, copyrights and other intellectual property (IP) is unusual in Tanzania, although it is permitted. Security cannot be created over unregistered IP, and if created, it becomes equitable security, which is not easy to enforce. For registered IP, security can be created by a fixed or floating charge.
Deeply ingrained in the saying that secrecy is the badge of fraud, the logic behind the public registration of security interests in Tanzania is to inform the public of the encumbrance of a given corporate debtor’s assets in order to stave off the perceived problem of ostensible ownership.