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The effect of a company going into administration under Tanzanian law—18

2018-12-16 08:54:49

By Paul Kibuuka @isidoralaw

As a company director or owner in Tanzania, you might have heard of the term ‘administration’, but what exactly does it mean? Who can appoint an administrator? How can a bank creditor appoint an administrator? What is the overarching objective for the administration and how long does the administration process last? What is the effect of administration on management and directors’ powers and on contracts? And finally, how does the process of administration come to an end?

This eighteenth part of our series seeks to answer these questions which are very pertinent in the current environment where creditors have become very unrelentingly aggressive and directors and shareholders are looking to protect their companies from those creditors while a rescue plan is completed. 

Administration is one of the official Tanzanian insolvency procedures. Administrators can be appointed to a company that is or is likely to become unable to pay its debts. An administrator can be appointed (a) by an order of the court on an application from a creditor, directors or partners; (b) by a creditor or creditors; and (c) by the company or its directors. Secured bank creditors must first be given the opportunity to appoint an administrative Receiver if they hold qualifying floating charges over the assets of the company.

The overarching objective for the administration is to rescue a company, as a going concern, typically by proposing a company voluntary arrangement (CVA) or scheme of arrangement. If this is not possible, the administrator will try to achieve a better result for the creditors than would be effected on a winding up or realise the company’s assets in order to make a distribution to one or more secured or preferential creditors.

It should be noted that administration cannot apply to a company after it has gone into liquidation or where the company is an insurer or a bank (Section 247(4) of the Companies Act 2002 (‘CA 2002’).  Normally, the process of administration can last for up to a year, but this can be enlarged by the consent of the creditors and/or by the court.

Upon appointment the administrator takes over the day to day control of the company and management of the affairs, business and property of the company as its agent and has many general powers bestowed upon him, including the power to use the company’s seal and to call up any uncalled capital of the company.

The directors continue to hold office but cannot exercise any management powers without the administrator’s consent which diminishes their powers greatly.  There is time and again some dialogue between the administrator and the executive directors as part of ongoing help to the administrator. 

If an administration order is granted, Section 249 of the CA 2002 provides that no legal action can be commenced or continued against the company. After his appointment, the administrator will require the directors to provide him with a statement of the company’s affairs detailing the company’s assets and liabilities (Section 260) so as to assess the company’s financial position and make proposals for implementation during the administration.

The administrator is also required to obtain details of the company’s creditors and to notify the company and all of its creditors of his appointment. The appointment must be advertised in the Gazette and in some newspapers of wide circulation in Tanzania. The Registrar of Companies at BRELA must be notified. An invitation to the creditors’ meeting will include a copy of his statement of proposals, which is sent to the Registrar of Companies and to all the company’s creditors (Section 261).

Contracts executed by the company do not automatically terminate when it goes into administration. But the administrator may decide not to perform a particular contract if that would help to achieve the goal of the administration. Because counterparties may terminate contracts with the company (indeed, many contracts provide for termination upon a company entering into administration), it is prudent for the administrator to negotiate the continuance of key contracts, including those with key employees. 

Of course, it is a worrying time for employees and business partners when a company announces its entry into administration. The administration will come to an end if the purpose of the administration has been achieved or if the company’s creditors require the administration order to be discharged (Section 256); otherwise, the administration can be concluded by a CVA, scheme of arrangement, or compulsory liquidation.

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, 15 December 2018

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