Q&A – 23 May 2011

Borrower no insurance, bank exposed

Our bank has lent money to a company in Dar which at the time of accepting the loan had insurance. The mortgaged property was to secure the loan. Unfortunately, the insurance expired and the insurance company did not inform us although we had informed them of our interest in the insurance. The mortgaged property has been severely damaged due to a fire and we stand exposed. Can we sue the insurance company?
PL, Dar

Normally it is not the duty of the insurance company to remind you when the insurance is expiring although many companies do so. It is the duty of the insured or the party that has an interest in the insurance, like your bank, to ensure that the mortgaged property has proper and adequate insurance.

Our opinion is that you cannot claim against the insurance company, unless there was an automatic renewal clause in the policy, which is unlikely. Insurance companies have, upon request, agreed with various banks to automatically renew policies upon expiry and to send an invoice to the bank to debit from the clients and/or bank’s account. We have noticed that many of the banks insurance officers or credit officers are negligent in handling insurance renewals which seems to be the case here.

You should also check the loan documents to see who is responsible for the renewal- is it the bank or the borrower. If it was the bank’s responsibility, not only can you not claim against the insurance company but can be sued by the borrower for negligence. We recommend you contact your attorneys.

Breach of contract

I entered into a contract with a fellow restaurant owner who I bought over, not to open a restaurant to compete with me. This was the deal from the beginning and we both agreed on it. It has been exactly six months and a new restaurant has mushroomed. The restaurant owner from whom I purchased denies that it is his- however it is quite clear that he is running it. He is physically there every day and I have witnessed this myself. Can I get an injunction to stop him from operating that restaurant?
LO, Dar

We have a couple of observations here. It is unclear if your contract disallowed him to open a restaurant or disallowed him to work in any restaurant. We raise this because he can easily come in and tell you that he is not in breach of the contract as he has not opened a restaurant but is merely working there. You may want to carefully look into this.

We now address the question of whether you can get an injunction against him. Our opinion is that it is very unlikely you will be successful in getting an injunction or sue the former restaurant owner. This is because that particular clause not to open a restaurant will likely be held by a Court to be in restraint of trade and against public policy. If he is a entrepreneur or chef, what do you expect him to do? Your attorneys can interprete the entire contract and guide you further but your chances of success are quite slim.

Facility letter, security documents contradictory

I took a loan from a bank which issued me with a facility letter that I accepted. I also signed various other loan documents including a debenture. Due to some cash commitments elsewhere we did default once, which we have now rectified. However the bank is keeping the pressure on us to pay the entire loan. The facility letter and the security documents we signed also contradict each other. How can I get out of this loan?
BG, Arusha

Covenants and default clauses can appear either in a facility letter or in the security documents. We generally recommended that covenants designed to protect the security should be in the security documents and financial covenants are best set out in the facility letter. If there is a contradiction between the facility letter and the security documents, your liability still remains and you cannot escape it, in case you are trying to take advantage of the situation! The issue of contradiction depends on the wording of both the documents to see which prevails over the other in case of such a situation. We have noticed that because of the ‘copy paste’ facility in computers, there do occur many discrepancies in these documents and the banks have also been quite reckless.

Coming to the default clause- banks generally take defaults very seriously as they expect you to default again after your first or any subsequent default. Unfortunately for you, default clauses are very tightly drafted and the bank is likely right in its approach. However if the bank is being outrightly unfair whilst your servicing of the loan has been regularized, then you may take action against the bank in Court. You might have not disclosed to us all the facts and must involve your attorneys before heading to Court. Remember, gone are the days, when you could dilly dally paying back your loan.

Declaration of dividends

I am a member of a company that has been paying dividends religiously every year. The last two years there have been no dividends declared. Can I force the directors to pay a dividend?
LM, Dar

Dividends are normally paid out of the realized profits of the company. Dividends cannot just be paid to please you or any other shareholder. You have not revealed to us why dividends have not been declared. If it is for reasons of profitability, you stand no chance of success in filing any applications against the company or its directors to force payout of dividends. However if the directors are not declaring dividends based on their personal interests, or interests that do not benefit the company by the retention of such profits, then as a shareholder you can take the company and its directors to task. Before taking any action you must understand why such dividends have not been declared for the past two years.