SUMMARY PROCEDURES FOR ENFORCING LOAN DOCUMENTATION IN TANZANIA

When loan documentation, specifically a loan agreement, a debenture instrument, a mortgage deed, a share pledge agreement, and individual/corporate guarantee are used for a loan facility, they would normally set out enforcement procedures and/or mechanisms. That is, possibly through the institution of court proceedings or appointment of a receiver and/or manager to undertake the procedure or for the sale of the charged assets directly by a lender or any other procedure agreed by the parties thereto.

We have addressed herein below each document mentioned above and the manner in which each specific document is enforced. We have also highlighted practical challenges, which a lender may likely encounter in the process of enforcing such loan documentation.

Loan Agreement

Enforcement of a loan agreement arises when a borrower is unable to repay a lender a loan facility in line with the amortization schedule. Normally, a lender will issue a notice of default (Notice Letter) to the borrower giving him time to repay the outstanding amount due, while providing him with a clear written warning about the actions that will follow should he not comply with the terms thereof.

If there is no action from the borrower after sending the Notice Letter, then, the lender should file a suit in court, as a loan agreement cannot be enforced other than through the court process.

In practice, the lender is usually advised to enforce the underlining collateral(s) first, prior to instituting a suit in court, because certain collateral(s) (that is, a debenture instrument or a mortgage deed or a share pledge) automatically grant the lender the power to enforce them without resorting to court.

Debenture Instrument

When a debenture is used to create a security interest, the terms of the debenture will typically encompass enforcement procedures and provide for the appointment of a receiver and/or manager to undertake the process.

According to section 106 of the Companies Act, Chapter 212, Revised Edition 2002 (as amended from time to time), if a debenture holder appoints a receiver or manager under powers granted to him/it pursuant to any instrument, he shall, within seven (7) days from the date of order of such appointment, give notice of that fact to the Registrar of Companies and the Registrar shall enter that fact into the Register of Companies.

Where a receiver/manager has been appointed, any invoice, business letter, order for goods issued by or on behalf of the borrower shall contain a statement that a receiver/manager has been appointed. A receiver/manager so appointed is personally liable on any contract entered by him in the performance of his functions and any contract of employment adopted by him in the performance of his functions.

Share Pledge Agreement

In a charge over shares, a pledgee would enforce by using a power of attorney and share transfer form (both granted to it by the pledgor upon perfection) to transfer the shares to itself or a nominee. The pledgee must then process the share transfer form with the Tanzania Revenue Authority and obtain a tax clearance certificate and notify the Companies Registry of its newly acquired interest in the shares.

Mortgage Deed

The Land Act Chapter 113, Revised Edition 2019 of the laws of Tanzania (the “Land Act”) has provisions regarding enforcement of a charge over land. The lender (Mortgagee) can commence enforcement proceedings only if the Mortgagor (borrower or third-party collateral provider) has been in default for sixty (60) days and a notice has been duly issued for him to cure the default within that time period.

According to section 126 of the Land Act, where a Mortgagor is in default, a Mortgagee may exercise any of the following remedies: -

• appoint a receiver of the income of the mortgaged land;

• lease the mortgaged land or where the mortgaged land is of a lease, sublease the mortgaged land;

• enter into possession of the mortgaged land; and

• sell the mortgaged land.

Where there is a default in payment of any interest or any other payment or any part thereof or in the fulfillment of any condition secured by any mortgage or in the performance or observation of any covenant, express or implied, in any mortgage, the Mortgagee shall serve on the Mortgagor a notice of such default.

The notice required shall inform the recipient Mortgagor of the following: -

• the nature and extent of the default;

• that the Mortgagee may proceed to exercise its remedies against the mortgaged land;

• actions that must be taken by the debtor (Mortgagor) to cure the default; and

• that, after the expiry of sixty (60) days following receipt of the notice by the Mortgagor, the entire amount of the claim will become due and payable and the Mortgagee may exercise the statutory remedies.

The Mortgagee shall have the power to appoint a receiver of the income of the mortgaged land. The appointment of the receiver shall be in writing signed by the Mortgagee. The receiver shall have the power to demand and recover all income of which he is appointed a receiver, by action or otherwise, in the name of the Mortgagor and give effectual receipts for the same.

A Mortgagee after any time after service of the notice, enter into possession of the whole or part of the mortgaged land. However, this right of entering into possession of a mortgaged land is restricted, unless otherwise granted by an order of the land court, in certain instance as set out in section 130 (5) of the Land Act, that is, if that land is a dwelling house in which any person is in residence, if the land is used for agricultural purposes and/or pastoral purposes and in the case of any land where the taking of physical possession peaceably is not possible. In these instances, a court order will be required in order to take possession of the mortgaged land.

Where the Mortgagee opts to sell the mortgaged land by means other than a public auction, then he/it shall be required to give notice to the Mortgagor and any third party holding an interest in the Mortgaged Property of not less than fourteen (14) days in a prescribed form.

The Mortgagee exercising its power to sell the mortgaged land owes a duty of care to the Mortgagor, any guarantor of the sums advanced to the Mortgagor, any lender under a subsequent mortgage to obtain the best price reasonable at the time of sale. Where the sale of the mortgaged land is by way of public auction, it shall be the duty of the Mortgagee to ensure that the sale is publicly advertised in such a manner and form as to bring it to the attention of persons likely to be interested in bidding for the mortgaged land.

Individual or Corporate Guarantee Agreement

Same as a loan agreement and conditional upon the borrower having failed to pay the loan under the loan agreement.

There are several challenges that may be encountered by a lender in the course of enforcing loan documentation. These are: -

Challenges

There are several challenges that may be encountered by a lender in the course of enforcing loan documentation. These are: -

• chances of the debtor/borrower/mortgagor/pledgor moving to court to stop enforcement proceedings against it. In the process, it would normally seek injunctive orders to frustrate the enforcement process;

• in practice court proceedings take time and are usually protracted by technicalities, adjournments, and different side-line interlocutory applications;

• the current economic environment may be a hindrance towards seeking potential buyers of the charged assets. This means that the lender will have to retain or be a custodian of the charged assets until at the point when there are potential buyers;

• there are numerous costs which arise out of the enforcement process, such as, receiver’s/manager’s fees, costs of maintaining the charged assets, court case fees, lawyer’s fees and valuer’s fees to mention but a few;

• under a debenture charge, and at the point when a receiver/manager is appointed, chances are that a receiver would not find any valuable asset(s) for purposes of enforcement arising from a borrower stripping its assets. This mostly arises if there are no monitoring and evaluation techniques (for instance appointing a security trustee or periodic inspection of the charged assets or accounts of the borrower) employed by the lender to safeguard the charged assets throughout the duration of the loan period;

• at times there may be issues with non-perfection or errors in the perfection of loan documentation thus raising validity issues;

• unscrupulous borrowers may disappear as soon as there is a default on loan documentation, as a result, it becomes difficult to enforce them; and

• finding the best enforcement strategy is usually a challenge for some lenders, as it usually determines the success or otherwise of the enforcement process.

Note: This is not a legal opinion and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.