Q&A – 19 December 2016
Mistress wants my money
I had a long affair with a lady with whom I broke up recently. In return for her not telling anyone about our affair including my wife, we entered through our lawyers into a settlement agreement that I pay her Tsh 2.2M every month in addition to paying her medical insurance premium. In consideration the lady was to keep her mouth shut and stay in a different city. I have been paying her these amounts for the past 4 years and am now in deep financial crisis. She says that I have breached the agreement by not paying her and intends to sue me. How do I handle this? Have I not being overpaying her?
UI, Dar
Our answer will address the issue of enforceability of the agreement you entered into not the fact that it is likely, when you get sued if you do, that your wife will find out which was the precise reason you entered into the agreement.
It seems you entered into the agreement after being blackmailed and were under duress when you signed. It doesn’t matter if both your lawyers were involved. Also immaterial is the fact that you have been paying her for the past few years.
Our opinion is that the agreement is illegal in that it is against public policy and was entered into under duress after being blackmailed. The chances of the lady winning the case against you, assuming you have disclosed all material facts to us, are very low. If you are sued, we recommend that you also file a counter claim against the lady to pay you the sums you have paid her over the last few years.
So that you are not in a compromising position, you might want to consider informing your wife about this. That is for you to decide and you should perhaps consider meeting a marriage counselor prior to disclosing this to your wife.
The issue of adequacy of value does not come in as we believe your agreement was illegal from the outset. However Court’s will generally not go into the adequacy of a consideration.
Shareholders rich, company poor
There is a very large and successful company in Tanzania that has opened so called subsidiaries for each of its businesses. I supply goods to one of these subsidiaries which is always having difficulties paying. My question is twofold: how can the subsidiary be unable to pay the debt when its shareholders are very strong companies owned by very strong people. Secondly, can I directly claim my amount from the shareholders?
TY, Dar
Your first question on why the subsidiary is unable to pay its debt is a question we cannot answer. It is more of an accounting issue that you should ask an accounting firm, Your second question is very interesting and we answer it below. The shareholders of a company are distinct from the company itself meaning that the company has a distinct legal identity from the shareholders.
The shareholders own the shares of the company not the assets- the assets are owned by the company. The shareholders are also generally not liable for the debt of the company as it is the company that has borrowed not the shareholders in their individual names. If you have ever borrowed, you will realize that the banks make the shareholders sign a personal guarantee, which is meant to make the shareholder liable for the debt of the company as they are normally not automatically liable.
In order for you to reach out to the shareholders and make the shareholders liable, you need to pierce the veil of incorporation. In order for one to be successful in piercing the corporate veil, one must show the following two prongs: that there is such unity of ownership and interest in the firm that the separate personalities of the corporation and shareholder no longer exist; and that the Court’s refusal to allow piercing would promote an injustice or sanction a fraud.
The application of the above test has proven to be anything but simple, and there are some important caveats and inconsistencies that are worth pointing out.
There is no list of necessary and sufficient conditions to tie down this doctrine to determine what goes into the determination of the two prongs. Some Courts have at times only used one of the two prongs. Factors taken into consideration to pierce the veil of incorporation include commingling of funds and other assets of the two entities (ie shareholder and company), the holding out by one entity that it is liable for the debts of the other, maintaining identical equitable ownership in the two entities, use of the same offices and employees, use of one as a mere shell or conduit for the affairs of the other, inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, treatment by an individual of the assets of the corporation as his own and identical or significantly overlapping directors and officers.
As to the second prong, the key appears to be proof of some form of bad faith motivation underlying the actions of the company. A number of cases have offered the following clarifications as to what counts and doesn’t count as bad faith: a simple difficulty in enforcing a judgment or collecting a debt does not satisfy this prong, nor does the fact that the shareholder provide funds to a subsidiary for the purpose of assisting the latter in meeting its financial obligations, so long as it is not for the purpose of perpetrating a fraud. Inequitable results are more likely to be found in situations where the corporate form is used to avoid the effect of a statute or regulation. By the same token, Courts are perceived to be more receptive in those contract cases where the alleged wrong involves some sort of fraud.
Hence for you to be able to pierce the veil of incorporation and hold the shareholders liable for the debt of the company, you must satisfy some of the above. As stated before, piercing the veil and holding the shareholder liable for the debt of the company is not the easiest thing to do- your attorney can guide you further.