The slowing global economy has had an outsize impact on many of Sub-Saharan Africa’s commodity exporting economies including Tanzania.
In order to rescue companies in financial distress (debt-laden firms), the board and management may consider the scheme of arrangement, which is one of the principal formal mechanisms available for restructuring such firms.
Provided for under sections 154-156 of the Companies Act, 2002 (‘CA 2002’), the scheme of arrangement mechanism 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 mechanism can be used to effect the re-organization of the share capital of a company by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both. It can also be used to effect the reconstruction of one or more companies or amalgamation of any two or more companies.
Quintessentially, however, the scheme of arrangement 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 the scheme of arrangement mechanism 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, as long as 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 the 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 the scheme of arrangement mechanism is the lack of an automatic temporary suspension of creditor legal action against the scheme company; although I 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 the mechanism 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 the scheme of arrangement mechanism if the scheme adopted approves the enforcement of those rights. If supported by a three-fourth majority and sanctioned by the Court, the scheme of arrangement can be used to “cram down” creditors or shareholders who do not approve the scheme.
Although provided for under the CA 2002 and regulated by, among others, the High Court of Tanzania and the Registrar of Companies, the scheme of arrangement mechanism is 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 mechanism.
Yet businesses and the constituency of lenders in Tanzania can draw inspiration from the experiences of other jurisdictions like Singapore and the UK which suggest that, as a restructuring tool, the scheme of arrangement mechanism can provide an ingenious and positive path to turn the fortunes of debt-laden companies.
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Paul Kibuuka is a University of Dar es Salaam-educated lawyer specialising in tax, corporate, finance, investment and dispute resolution; and he advises corporate boards, CEOs and senior managers of SMEs, start-ups and multinational companies operating in Tanzania and other East African countries – alongside local counsel. Kibuuka is also the founding chairman and executive director of the Taxation and Development Research Bureau (TDRB).
Tanzania Law Blog - Paul Kibuuka's insights into Tanzanian law and the legal issues relating to doing business in Tanzania. 