Of business rescue and role of receivers in Tanzania—19

When a company borrows money from a bank, the financial institution typically takes security over assets of the firm to guarantee payment.

And regardless of the macroeconomic landscape in Tanzania, if the company fails to honour the terms of the loan or experiences financial difficulties, the bank with the security of a debenture (floating charge) over the whole or substantially the whole of the company’s assets may find it necessary to appoint an administrative receiver.

It should be noted at the outset that claims of unsecured creditors are not dealt with in a receivership, but are normally dealt with in the consequent liquidation of the company. ‘Administrative receivers’ have similar powers to the ‘administrators’ described in our last week’s eighteenth part of this series and they may continue trading so as to facilitate a going concern sale of a company’s business and assets.

All too often receivers face criticism in the discharge of their duties and responsibilities, as there will be other parties interested in the assets in receivership bringing proceedings to court to challenge actions of the receiver that are viewed to be unfairly harmful to their interests. Therefore, in this nineteenth part of our series, we highlight the role and duties of a receiver under Tanzania’s law and some challenges and law reform issues.

A receiver occupies a common yet strange position in that although he is the agent of the debtor company which owns the charged assets, his main concern is to ensure repayment of money to the secured lender by selling the assets or even the whole business as a going concern. In short, the receiver is appointed by the lender, yet is the agent of the debtor company until it goes into liquidation.

Courts in Tanzania have firmly declined to deflate the agency as a legal fiction. In the case of Calico Textiles Industries Ltd (Acting through Nimrod Elireheemah Mkono, a duly appointed receiver and manager) v. Zenon Investments Ltd, Registrar of Titles and NBC Holding Corporation [1999] T.L.R 100, Hon Mackanja, J (as he then was) acknowledged and agreed that the debenture under which Mr Mkono was appointed rightly declared that the receiver and manager is the agent of the debtor. Banks still provide in charging instruments and deeds of appointment that the receiver is appointed as the debtor’s agent.

The deed of appointment expressly stipulates the powers of a receiver; however, if a receiver is appointed by the court, the court order will set out the scope of his powers. Where the charged property is a commercial property the deed may confer the power of leasing the property on the receiver if it is thought to be the most effective debt repayment method, or even to generate revenue pending an agreement to sell. Commercial lawyers, bankers, and court-appointed receivers have time and again debated the limits of the powers of a receiver to sell landed property out of a receivership.

The receiver owes no duty to the debtor company or any other creditor save for his duty to, inter alia, (a) discharge preferential creditors out of any floating charge assets to the extent that uncharged assets are insufficient to discharge them; (b) to take reasonable steps in obtaining a “proper price” on a sale; and (c) to account to the company or any subsequent charge holders for any surplus assets after the appointor’s claim is fully discharged.

If a receiver discharges those duties in good faith, he may not be directly liable where his actions turn out to be disadvantageous for the debtor company. If in breach, he may be personally liable unless such liability is explicitly excluded.

One of the major challenges to receivership in Tanzania comes from loan guarantors who are liable for recovery shortfalls. In many cases, guarantors contend that the asset sale was at an undervalue and that this increased their liability under the deed of guarantee.

Moreover, the governing law in receiverships and corporate insolvency in Tanzania is mainly the Companies Act, 2002, but this Act is too complicated for ordinary businesspeople whose companies may be the subject of rescue operations (and their guarantors) to understand since it is not sequential (e.g. it deals with winding up in Part VIII before subsequently dealing with the appointment of a receiver in Part IX. Maintaining the insolvency regime in a separate legislation would reduce the voluminous and intimidating nature of the Act.