10 Reasons why the Proposed Article 400A of the Tanzania Companies Act will discourage foreign direct investment in Tanzania.

The National Assembly is debating various changes to the Bill, the Written Law (Miscellaneous Amendments) (No 3) Act of 2019 (the Bill), which has been brought under a certificate of urgency. The Bill proposes amendments to the Companies Act and other various Acts. Under the Bill, Section 10 Amended The Companies Act by adding immediately after section 400 the new section 400A Which will provide for the Powers of Registrar to strike off a company fraudulently registered or conducting illegal business.

The following are the 10 reasons why this proposed Section will discourage Foreign Direct Investment in Tanzania;

  1. Striking off a company is normally reserved for cases whereby a company is not operational or carrying on a business. Article 400A proposes that a company that is operational and conducting a business may be struck off.
  2. The Registrar of Companies’ powers to strike off any company can be exercised not based on a definitive and conclusive evidence, judgment or conviction from court of law, but on a belief that may constitute a reasonable ground.
  3. One of the reasons for a company to be struck off is if the Company is “fraudulently registered” (Section 400A (1) (a)) and this goes against the principle of the “conclusiveness of certificate of incorporation” provided and guaranteed under section 16 (1) of the Companies Act which states that a certificate of incorporation given by the Registrar is conclusive evidence that all requirements of this Act in respect of registration have been complied to. Essentially, this weakens the value of a certificate of incorporation under the Companies Act of Tanzania.
  4. Section 400A (1) (c) proposes that a company can be struck off because of “misrepresentation” by the registered company directly contradicts section 472 of the Companies Act that provides that false statements and misrepresentation may constitute an offence which is punishable by conviction or a fine. It does not provide that a company can be struck off due to the extremity of such a procedure and its consequences.
  5. Section 400A (1) (b) undermines the authority of the Financial Intelligence Unit established by the Anti-Money Laundering Act of Tanzania and puts in danger any investigation or criminal proceeding taking place with regards to offences under this Act. It also denies the right to be heard and to have fair trial since the Registrar in striking off the Company based on a belief has already condemned.
  6. The shareholders and directors being prohibited to enter the country as a ground for the Registrar to strike off a company denies the freedom of shareholders to appoint other directors so as the management of the company can continue or to exercise the shareholders’ right of constituting a proxy so that his or her rights are still exercised. This is a direct interference in the affairs of a private company.
  7. In striking off a Company, the Registrar has no obligation beforehand to notify creditors that may have claims over the Company and creditors will not have any right to object until after the Company is struck off where a long process of restoration is to commence should creditors wish to enforce their creditors’ rights. Where restoration is granted, the Company will have to pay interest it accumulated from the date the Company was struck off irrespective of whether or not there was cause since the financial instrument will be valid despite the Company being struck off (section 400A (6)).
  8. Once a company is published in the Gazette as being struck off, any other person / company can register a company using the same name as the company struck off and this mere fact negates the right of the company that has been struck off to ever be considered for registration again, even where the court may find cause for restoration and another person/ company can benefit from the brand equity built by the Company that is struck off “just like that”.
  9. Section 400A undermines the provisions in the Companies Act for winding up a company which are there to protect creditors, partners and shareholders. This provision seeks to punish which is contrary to the spirit of the Companies Act and general principle of good faith in conducting business.
  10. Section 400A gives Registrar of Companies unprecedented powers “to undo” what potentially has taken investors years “to do” and potentially if exercised goes against the principle of sanctity of contract as enshrined in the Law of Contract Act of Tanzania.
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