Q&A – 27 August 2018

Personal guarantee consequences

I gave a personal guarantee to a friend of mine for a loan that he took. He has disappeared, his mortgage was fake and I am now heavily exposed. I gave him this guarantee as the bank insisted that they would only give him the loan on condition that they got me to sign up a guarantee. I am neither the borrower nor have I benefitted with even one shilling from the loan. Is my matrimonial property at stake? How do I get out of this? Can I now cancel my guarantee and how do I go about this?
II, Dar

A very famous banker once told us that never guarantee someone else’s loan unless you are ready to pay it on his behalf. Hence such guarantees should be selectively signed and take into account that it is not merely a piece of paper you are signing, which looks very innocent when it is presented to you, but your wealth and well-being could be exposed. Banks are not playing theoretical monopoly but in serious business and will not be your ‘friend’ when the borrower will default.

It is not easy to escape the personal guarantee unless you prove some form of fraud or collusion between the bank and the borrower, which might not be easy. You stated that the bank wanted to give the loan only if you sign the guarantee- perhaps you can further investigate why that was the case.

Your matrimonial property is unlikely at stake as there is no spouse consent, which is a mandatory requirement, but your lawyer can guide you further. Whilst you might be able to cancel the guarantee, all amounts payable up until you cancelled the guarantee will still be your liability.

Arrest of judgment debtor

I won a case against an individual and he refuses to pay me. I have tried very hard but it seems my softness to pursue for recovery is being misinterpreted. Are there any provisions of arrest if I am not paid? What are the advantages and disadvantages of this approach?
QP, Dar

Indeed there are provisions whereby a judgment debtor may be arrested in execution of a decree. The Civil Procedure Code (CPC) of Tanzania provides that a judgment debtor may be arrested in execution of a decree at any hour and on any day, and shall, as soon as practicable, be brought before the Court, and the Court may order his detention.  The CPCfurther provides that where the decree in execution of which a judgment-debtor is arrested is a decree for the payment of money, and the judgment-debtor pays the amount of the decree and the costs of the arrest to the officer arresting him, such, officer shall at once release him.

The detention is for a period of six months and he may only be released prior to the six months if he pays up or on the request of the party that requested his detention or on the omission by the person on whose application he has been detained to pay subsistence allowance.

Please be informed that the law requires you, the decree holder, to pay subsistence allowance to the judgment debtor when he is in prison and failure to pay such amounts to the normal standard of the judgment debtor is a ground for him to be released.

The advantage of this detention approach is that the judgment debtor might pay in fear of imprisonment. The main disadvantage is that if the judgment debtor does not fear going to jail for six months, you will have to incur further expenses to keep him there, and still not recover the amount. All subsistence allowances that you spend on the judgment debtor whilst in detention, may be added to the debt owed to you.

Purchase of shares or assets

I am negotiating with a party to purchase a certain company that produces a famous product. When negotiating I am unsure whether it is to my advantage if I purchase all shares of the company or only purchase the company’s assets. Is this one and the same thing?
DP, Dar

Your decision on whether to buy the shares of the company as opposed to the assets alone, or vice versa, will largely be dependent on tax considerations. For example when you purchase shares, the seller must pay capital gains tax and also applicable is stamp duty for the share transfer. When you purchase the shares of the company, you become the company’s member, and you then carry the burden of both the assets and liabilities of the company.

The biggest fear for businessman are tax consequences. The Tanzania Revenue Authority (TRA) is allowed by law to reopen your books for upto five years and in some instances more than five years. That means that after you take over the company, the TRA will hold the company liable to pay tax and you, as a member of the company, may end up suffering. If you want to buy the shares of the company, it is advisable that the books of accounts of the company be properly looked at and re-audited, to ensure compliance. In the sale of shares agreement, you should also insert a provision in which the seller covenants with the company and you as an individual member, to indemnify both against tax liabilities incurred in the past years but assessed after the transfer of shares.

Coming to the sale of asset. This allows you to carry on the business under the umbrella of your own company with fewer taxation hassles. This type of transaction does not come with the liabilities of the company and hence is the preferred way of taking over a company’s assets in Tanzania. Value Added Tax may apply, depending on the type of asset and business you are engaged in. And yes if it is a famous product, don’t also forget to buy the trademarks of those products. Many a times the company’s value is in its trademarks than in the assets. You should consult your auditor and/or tax consultant for further information.