Q&A – 28 February 2011

Why should I sign a personal guarantee

What is the difference between a corporate and personal guarantee and can a bank ask for both? Is it not against the principles of veil of incorporation to ask for a personal guarantee? I am an appointed director in a company but not a shareholder. Why should I sign such a guarantee when I do not get any dividends or financial benefit out of the company?
GJ, Dar

A guarantee in loan matters means that the person is promising something and giving an assurance for the repayment of a loan. In law there are several types of guarantees including the ones you have mentioned- corporate and personal guarantees.

A corporate guarantee is when one company gives a guarantee for another company for the repayment of whole or part of the loan which remains unpaid incase the debtor fails to repay the said loan. In the Tanzanian market a corporate guarantee is given by either the holding company of the borrowing subsidiary company, or given by a sister company that has some elements of common shareholding in the borrowing company. Such corporate guarantee is only enforceable if the corporate guarantee has been properly approved by the company’s board of directors and the memorandum and articles of association (MEMARTS) allow the company to give such guarantees. We have often noted that banks in a bid to try and disburse the loans do not get proper board resolutions from the company guaranteeing the loan or do not bother reading the MEMARTS to check if the board is acting within its powers. This has serious repercussions for the lender in the event of trying to enforce such a guarantee. Banks here then end up blaming the Courts for not ruling in their favour!

On the other hand, personal guarantee is the guarantee given by an individual that he/she will repay the whole or part of the loan incase the borrowing company fails to repay it.

The main difference between the two is that corporate guarantee is given by a body corporate while personal guarantee is given by an individual.

We now turn to your question on the veil of incorporation which we believe is a very important question that most directors and shareholders ignore. The veil of incorporation is a principle of company law that ensures a company is a separate legal entity from its directors and shareholders, thus protecting the personal assets of owners and investors from lawsuits. When a director or shareholder signs a personal guarantee, he is exposing himself to the risk of being personally liable for the debts of the company. This is standard practice in a number of countries as banks want to minimize risks. However in some countries, the banks charge you higher interest rates when you do not want to sign such a personal guarantee. This option is unfortunately nor available here.

Your question is why should you risk your personal assets for a company in which you are merely a director and not a shareholder. We agree with you. Why should you. In the premises, you can refuse to expose your personal assets for the benefit of a company loan and should not sign the personal guarantee.

Traffic police asking for a ride

I was stopped by a traffic police and asked to give him a ride. I am a foreigner and don’t really know how things work here and hence declined. The officer then radio called the traffic officer at the next junction who again stopped me. I was subsequently taken to the traffic police and questioned. Is it mandatory for a driver to give a ride to a traffic policer?
PO, Dar

We are not aware of any law that compels you to offer a lift to a traffic police officer. Being taken to the police station for not giving a ride amounts to misuse of power of the officer and you can report this to the head of traffic police in Dar es Salaam. Make sure your complaint is in writing and you get an acknowledgement of the letter. You do not want the letter to ‘get lost.’ You should then also follow up for a written response. We hope you know the ID number of both the police officers.

Defending myself in Court

I have been charged with the offence of theft and wish to defend myself. Is that allowed? What do you suggest I do? Any books I can read?
LO, Moshi

In law there are principles of Natural Law which are the basic and most sacred principles which must be observed. One of them is “the right to be heard”. This means that whoever is charged with any kind of offence has the right to defend himself or herself. The procedure is as follows: during your arrest amongst others you must be informed of your right to an attorney, your right to remain silent and be promptly taken to a police station. Once you are arraigned in court, the charge will be read to you and you will have to plead either guilty or not guilty. Theft is a bailable offence and bail shall be open only that you need to satisfy the bail conditions. It is likely you will plead not guilty. After such a plea a preliminary hearing is conducted where the prosecution will give its list of witnesses and you will be required to give your list. Trial then begins whereby the Prosecution brings its witnesses and you can cross examine them. You need to counter the testimony of the witnesses to disprove the allegations against you.

This all might sound sensational as we write it, but please be reminded that Court rules can get quite technical and advice that you engage an advocate to represent you.

Several high profile personalities including former Liberian President Charles Taylor, former Yugoslavian President Slobodan Milosevic defended themselves in trials. For more tips, we recommend you read a book by a well know retired Judge, B. D. Chipeta, titled “A Handbook for Public Prosecutors.”