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MZUMBE UNIVERSITY-MWANZA CAMPUS SCHOOL OF BUSINESS

NAME: BONIPHACE DONALD MAKERE

REG. NO:

MBA/EXE/MZA/006/T.12

COURSE:

MBA- CORPORATE MANAGEMENT

SUBJECT CODE:

LAW 5112

SUBJECT TITLE:

CORPORATE LAW AND GOVERNACE

NATURE OF WORK: QUESTION:

TERM PAPER

You are working with the leading Trading Company in East Africa as a Company Director. You are invited to present a paper on The legal Framework on protection of creditors in Tanzania in seminar to be held at Namugongo Obote Conference Hall in Kampala Uganda at a date to be mentioned later. Required: In light of the foregoing, explain at least four (4) key points justified under the Companies Act that you must include in your discussion.

Background of Company Act, prior to 1st March, 2006 the main legislation regulating companies ordinance Cap 212 which enacted in 1929. It regulated among other trading companies and other associations. During all these years when a company became insolvent, it went directly to the court for wind-up proceeding. At that time there were three grounds for winding up by court, voluntary and under supervision of court. On 1st March 2006 The Companies Act No 12 of 2002 came into force containing substantial reforms. The Act deal with registration and windup of the companies. A creditor is a party (e.g. person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is the creditor, which is the lender of property, service or money. The term creditor is frequently used in the financial world, especially in reference to short term loans, long term bonds, and mortgage loans. In law, a person who has a money judgment entered in their favor by a court is called a judgment creditor. The term creditor derives from the notion of credit. In modern America, credit also refers to a rating which indicates the likelihood a borrower will pay back his or her loan. In earlier times, credit also referred to reputation or trustworthiness (http:// en.wikipedia.org/wiki/creditor) In simple words we can say creditor is the one issue money to firms or companies with an interest. Creditor protection is a collective term that is used in two different ways. One common use has to do with the various resources that provide debtors with an equitable amount of protection from creditors in the event that the debtor is unable to pay off an existing obligation according to the terms and conditions related to the transaction. The other application of this term has to do with the protection of creditors, in terms of limiting the loss incurred when a debtor defaults on an outstanding debt. (http:// www.wisegeek.com/what is creditor-protection)

The term Company means an artificial being, intangible, invisible which exist only in contemplation of the law. This definition captures both the companies which are formed by more than one member who are associated together for various purposes and as well for a single shareholder companies which are formed by only one shareholder. It signifies therefore, for the formation of a company it is not necessary there be an association if it is a single shareholder company. (Masawe M and Ombella J: 2011) According to the section 2 of companies act (212) of 2012. State that a company formed and registered under this Act or an existing company. How creditors in Tanzania are being protected Capacity of the Company to contract, It means Company has capacity to make contract or transaction. In memorandum and article of association stipulated object clause which defines the range of activities of the company. It explains what the company can do and limits the scope of activities of the company. The case of Ashbury Railway carriage and Iron Co Ltd vs Riche (1875) which concerned with the objects clause of the company, which allows for un limited objects for which company may be run. Furthermore any limits a company does have in its objects clause has no effect whatsoever for people outside a company. The objects were To make and sell or lend on hire railway carriages and clause 4 said activities beyond needed a special resolution. But the company agreed to give Riche and his brother loan to build Railway in Belgium, Later the company refused the agreement, Riche sued and the company pleaded the action was ultra vires. It was held that capacity of a company incorporated under the act of 1862 was limited to the object in the memorandum of Association. Constructive notice, creditor should understand what is within the company, this means before making a contact or making transaction should have knowledge on what is going on within the company. Initially every outsider dealing with company was deemed to have notice of the documents. Everyone who wants to transact with the company should make an inspection of the documents. The purpose of this is to understand if the proposed transaction with the company was within the permitted range of activities of the company.

However transact into the company need not to know what is inside the company ( In door management principle) Creditors should not need to know what is going on inside the company. They are not presumed to know what may have taken place behind the doors closed to them. According to section 37 of company Act of 2002, it is not necessary a company to investigate or enquire what company memorandum has permitted to do a certain thing. Section 36 of company Act of 2002, for person to work and act in a good faith. Investigation into company affairs, Registrar has power to call for documents or insufficient documents, the purpose is to protect public include creditors. Creditors can inspect the documents to registrar. Section 108 & 109 of company act, state on right to inspect the property of the company. Reduction of shares capital, Company can make alteration to the MEMART by either increase or reduced capital. Once they reduced the share it will affect creditors. Before make alteration they should pass resolution, creditor should be notified on reduction of shares. Resolution should not passed until 35 days, (creditors are given allowance of 35 days). They should notified through government gazette, Section 71, According to the section it show how creditors can make challenge on resolution to the court. Insolvency, This is situation when a company become bankrupt, Company can decide to ask court to windup the company. Windup of the company means company activities are end-up. The high court has power to wind up the company, this according to section 275 of company Act. Windup of the company may be done either voluntary or by court. Voluntary windup is occurring when directors of the company decide to windup the company voluntary, this is according to section 267 of company Act. There are some circumstances which a company may wound up voluntary

By special Resolution of Directors. Time is fixed by Articles of Association. Special resolution by Directors due to liabilities.

This is according to section 333 sub 1 (a) to (c) of company Act. Court windup is occurring when a court decide to windup the company, this according to section 275 of the company Act. This is compulsory windup. There are some cirmstances which a company may wound up by court - By special resolution. - A company does not commence a business within a year. - The number of members falls below two. - The company is unable to pay its debts. -The court is of the opinion that it is just and equitable that the company should be wound up. This is according to section 279 of company Act. However we can see how creditors are being protected by law before windup of the company, creditors can file petition to the court and appoint liquidator to safe-guard the interest of the company. Creditors meeting, Creditors shall call themselves and decide on how the company should pay debts, According to section 261 1 (b) and 262 of company Act; Creditors may call committee and discuss on debts. During meeting they shall approve administrators proposal who will report the results of the meeting to the court. This is also legal framework on protection of creditors. According to section 265 of company act 2002 creditors may apply to the court by petition for an order on company affairs have been managed by administrator in a manner which is unfairly prejudicial to the interest of its creditors.

Issuing of memorandum of satisfaction, Section 104 of company Act 2002, registration of satisfaction and release of property from charge. Registrar after certify that the debt for which charge was given has been paid, registrar issue memorandum of satisfaction conclude the payments of creditors. Despite of legal protection of creditors still there are some challenges regard protections of creditors in Tanzania, Registration of charges according to section 100 of company Act 2002 which instruct the company to make registration every charge created by the company, Non compliance of this may imposed fine, it is mandatory to register. Bear debentures, Debentures can be said to mean an acknowledgement in writing of a debt by a company to some persons and it is issued to the means of a prospectus in the same manner as shares. Debentures are therefore a form of security which may be bought and sold in such way as shares. In order to give lenders some security against nonpayment of their loans a charge is often against assets of the company. Floating charge, Company can temper with asset and give to another person, floating charge is not good since it attaches to the property charged in the varying condition in which it happens to be from time to time such a charge remains dormant until the undertaking charge ceases to a going concern or until the person in whose favor a charge was created takes steps to crystallize the floating charge. In conclusion, Director can present paper on legal framework on protection of creditors in Tanzania on the grounds for protection as explain above though there some challenges which may face hence results into loss to creditors.

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