Q&A – 1 August 2011

Lifting the veil of incorporation

I have been supplying mining equipment to a company that is subsidiary of a very powerful company that is also registered in Tanzania. The subsidiary company is facing major financial problems as the mineral it is mining has decreased in price. Additionally the holding company has been milking the subsidiary company dry. The amount outstanding is over Usd 2.2M. Can I stop my supplies to this subsidiary? If I sue them, can I claim from the holding company as they have all the muscle to pay me?
PK, Mwanza

Your first question is can you stop supplying the subsidiary. Although we have not seen the contract between you, non-payment of the purchase price is always a material breach and terminable. You should however check if there is any grace period clause in your contract. If there is, you should stick to it before you make any moves. This might be a temporary cash flow problem and you do not want to jeopardize a potential long term client for a short term issue that might be solvable. In short, try and balance between the commercial decision to continue working with the company with the decision to stop supplies and suing.

We come to your second question which is a very interesting question. Normally two companies are treated as distinct and independent.

Courts are usually reluctant to hold one company liable for the actions of another, be it a holding company or sister company. It is the principal reason of having companies with limited liability. In Tanzania you will notice that many property dealers use different companies to develop different properties. The shareholders and directors might be the same but the companies are distinct and independent. This type of arrangement is not illegal per se. However that may not be the case every time.

In law there is a doctrine of lifting the veil of incorporation, where the Courts may allow a creditor to recover a debt of a subsidiary company from a holding company or personally hold liable the directors or shareholders of the subsidiary company, if that subsidiary company has been used by the holding company or directors and shareholders to perpetuate fraud.

Normally the test the Court adopts is whether there was a lack of formalities between the entities, comingling of funds and assets, one of the companies was seriously undercapitalized and if the veil is not lifted, it will sanction fraud or promote injustice.

Your thinking is right- even if you sue, the subsidiary company may not be able to pay you. Your only salvage may be the holding company.

If you can prove your allegation of the holding company milking the subsidiary company, you might be able to lift the veil. It is not an easy task but your attorneys can pursue it.

Breast implants illegal

My boyfriend wants me to have a big chest before we marry and has requested that I get breast implants at a private hospital in Dar. I consulted a lawyer friend about this who said that since I am a Tanzanian citizen, the state does not allow change of body structure. How can the State monitor such operations? What can I do?
HG, Dar

We have personally never heard of any doctors or hospitals in Dar es Salaam who have the capacity to perform breast implants. We stand to be corrected though. The doctrine of the state trying to protect you from undergoing a change of body structure because it has an interest in you is unheard of. It would be illegal to go to the gymn as weight loss does lead to body structure changes also! Yours is a surgical intervention leading to this structural change. It is not an operation for abortion. This is an operation that you want to undergo for a cosmetic change and as long as it is safe and not against public policy, we don’t see a problem. The States interest is primarily your safety.

What your lawyer might be saying is that you can only undergo such procedures at hospitals that have accreditation and a licence. The implant itself must also be approved by the Tanzania Food and Drug Authority (TFDA). If the TFDA has not approved the material to be used, usage of such material is prima facie illegal. We suggest that you contact the TFDA to make sure that the material for such surgery is approved; the Ministry of Health should be able to guide you whether the Doctor and hospital have the licence and expertise to perform this highly intricate operation.

Eviction for delayed rent payment

I am currently renting premises for residential purposes and have a problematic landlord. Due to some travelling, I delayed payment of rent for about two weeks. The landlord is now threatening to evict me. Can he legally do this?
TS, Dar

Your landlords move is illegal. Under the law, you are obligated to pay your rent on the due date. Should you not pay, the Landlord has a right to demand such payment or evict you if necessary. Even though the landlord has such rights, there are certain procedures that must be followed.

First, you must have delayed to pay rent for not less than 30 days and he must issue a 30 days notice demanding for payment of rent unless you have agreed otherwise. If you fail to pay the rent within the 30 days demand period, the landlord has power to evict you.

A two week delay does not warrant eviction under our laws. You should explain this to him. If he is still adamant, you can make an application in Court to stop this eviction. The landlord might have other motives that you are unaware of. Make sure you get hold of all the facts that will assist to guide your attorneys.