A new breed of legal support

The use of Tanzanian ‘security trustees’ in secured financing—13

2018-11-11 09:02:53

By Paul Kibuuka @isidoralaw

Although trusts and agency arrangements in Tanzania are generally governed by the Trustees’ Incorporation Act (Cap 318) and the Law of Contract Act (Cap 345), the role of a ‘security trustee’ or ‘security agent’—authorized to hold and manage collateral under a domestic or international secured financial transaction in its own name but for the benefit of a bank or other creditors—is not explicitly regulated by Tanzanian law.

Moreover, Tanzania is not a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition (‘the Hague Trusts Convention’) that was concluded in 1985.

Because of the surprising paucity of legal regulations for the use of security trustees in Tanzania, in this thirteenth part of our ongoing article series, we consider some hands-on issues; namely (1) whether security trustees in Tanzania can validly hold and manage collateral under domestic and international secured financings; and (2) how banks and other creditors can reduce the risk of opposing the validity of collateral held by a security trustee.

In a domestic secured financing, the creditor(s); the debtor; and the assets (over which security interests e.g. mortgage, pledge, etc can be created) are situated in Tanzania or deemed to be situated in Tanzania as a matter of law.

Due to the accessory nature of the mortgage and the pledge (i.e. they follow the secured claim and if separated they will be extinguished) and the substitutable use of the terms “creditor” and “mortgagee”, there is a view that a security interest governed by Tanzanian law is valid only if the creditor and the person to whom the security is granted are in chorus.  

This view would imply that such a security interest can only be validly granted to a creditor and not to a security trustee who is not the creditor of the secured financing. But this is contestable: the Law of Contract Act, inter alia, governs the legal relationship in which the agent creates legal relations with a third party on behalf of the principal.

Therefore, if we cogitate about the principles of agency law stipulated under the Contract Act, it is theoretically possible that, under a contractual arrangement, a security trustee/agent should be able to represent a bank or other creditors and to validly hold collateral security in its own name on behalf of the bank or creditors.  

This legal thinking would not be out of step with Tanzania’s necessarily accessory nature of certain security interests, as creditors will be collateral holders in relation to the agent and the third party notwithstanding that the collateral security is not formally transferred to the third party.

Actually, there has been use of a security trustee/agent in Tanzania; however, the operation and enforceability of such a concept is, to our knowledge, yet to be tested in Tanzanian courts. So, there is a risk of opposing the validity of collateral held by a security trustee/agent.  

The risk also exists in international financing, where the facility letters and security agreements are governed by say, Chinese law, but the security interests are to be created and perfected in accordance with Tanzanian law and the transaction documents require a security trustee to hold and manage the collateral.

Banks and other creditors could minimize the above risk by using parallel debt provisions which involve an abstract acknowledgement of debt by the borrower in favor of the security trustee/agent corresponding to the underlying secured claims of the creditors. But such provisions have not been thoroughly tested in Tanzania yet.

Generally, to avoid double repayment, each reduction of the creditors’ claims also reduces the parallel debt and vice-versa. Be that as it is, any attempt to challenge a parallel debt, particularly during insolvency proceedings, cannot be ruled out.

Owing to the legal uncertainties and risks of using security trustees/agents to hold and manage collateral in Tanzania, banks usually hold directly the security interests. Nevertheless, bearing in mind the principles of agency law stipulated under the Contract Act, using a security trustee/agent to hold collateral does not prevent the agent as a lender’s direct representative from being authorised to manage the collateral on behalf of the lender.

Notable developments that would eliminate the legal uncertainties and risks of using Tanzanian security trustees/agents in domestic and international secured financial transactions would be for Tanzania to unambiguously introduce the security trustee/agent concept into its laws and to join the Hague Trusts Convention.

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, 10 November 2018

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