Practice Areas > Syndicated Lending
Lawcastles has acted for both borrowers and lenders in many transactions in a broad range of corporate financings involving a variety of structures. Lawcastles has extensive experience in providing services in syndicated lending transactions. The firm assists in structuring the syndicate, providing service to arrangers, administrative agents, security trustee, etc. It also assists borrowers to deal with lender requirements, including loan documentation and supporting securities.
The firm has significant experience in conducting due diligence, drafting appropriate loan documents of all types, giving legal opinions, perfection of securities through filing and/or registration, etc. One of the projects that have been concluded recently in which Lawcastles provided advisory services involved acquisition finance loan facility (US$ 650 million). In this transaction, Lawcastles acted as local counsel for administrative agent, namely, Wachovia Bank, National Association in relation to taking security over the assets of the borrower’s Tanzanian subsidiary.
The types of collaterals available include land, ships, aircraft, equipment, mineral rights, shares, benefit of a contract, receivables, bearer securities, etc. In addition, a number of other devices can be used as collaterals without in law creating security interests. These include the reservation of title under a contract of sale, contractual set-off and cash deposit expressed not to be repayable until the debt secured has been repaid. There are broadly four types of security interests that can be created over available collaterals. These are mortgage; charge; pledge; and lien.
Mortgages
A mortgage arises when the right over an asset is conveyed by the debtor to the secured party as security for the obligations, but subject to a right to have the asset reconveyed when the obligations are performed. Land is the most important asset on which a mortgage can be created. Land can be owned either by way of right of occupancy or lease. A mortgage can be created over a right of occupancy or lease. Rights of occupancy are always given by the Government for a term not exceeding 99 years. Leases can be created out of a right of occupancy for any term which does not exceed the length of the right of occupancy.
A mortgage is created by way of mortgage deed which must be executed in accordance with the law. Mortgage deeds over land must be sealed by the company in the presence of two directors or one director and the company secretary. If the mortgage deed over land is executed by an individual, it must be signed by that individual before the notary public. There are prescribed forms for execution by companies and individuals in land related security interests. The mortgage deeds executed by companies which do not involve land are not required to be sealed though most authorities demand sealing.
The creation of mortgage over land is subject to consent of the land authorities.The creation of mortgage over registered land is perfected by way of registration under Land Registration Act, Cap. 334. A mortgage over unregistered land must be registered in the registry of documents established under section 3 of the Registration of Documents Act, Cap. 117. The mortgage ranks according with the order in which they are registered. If the mortgage is not registered, a mortgagee is, generally, not entitled to exercise statutory recognized remedies.
Other assets which can be mortgaged are mineral rights, movable properties, book or other debts, registered securities, negotiable instruments and choses in action. A mortgage created by an individual over chattels, book or other debts, registered securities and negotiable instruments must be registered within twenty one (21) days under the Chattels Transfer Act, Cap. 210. A mortgage over mineral rights must be registered in Registers of Minerals Rights established under section 105 of the Mining Act, Cap. 123. A mortgage over registered ships must be registered in the register of ships mortgages under section 88 of the Merchant Shipping Act, 2003. A mortgage over an aircraft can be registered by way of title sharing under Regulation 6 of Civil Aviation (Aircraft Registration and Marking) Regulations, 2006.
Mortgagees over land have four primary remedies in the event that there is a default by the mortgagor on the secured obligations: they can appoint a receiver of the income of the mortgaged land; they can lease the mortgaged land or where the mortgaged land is a lease, sub-lease the land; they can enter into possession of the mortgaged land; or they can sell the mortgaged land. The rights of entering into possession and sale of land are limited by the Land Act, 1999. The mortgagee can also sue upon the covenant to pay which appears in most mortgage instruments. The mortgagee is entitled to pursue all of its remedies concurrentlyor consecutively.
Charges
A charge is a right which is normally given by a debtor company to a creditor to have recourse over the company’s assets where the debtor fails to meet its obligations to the creditor. A charge can either be fixed (or ‘specific’) over identified assets or floating (or ‘not specific’) over changing pool of assets. The registrable charges are described under section 97(1) of the Companies Act, 2002. Charges cannot be created by individuals.
The charges are normally created using debentures though the law allows the creation of charges using any form of document such as mortgage deed, trust deed, etc. A debenture is a contract that is entered into by a company and the creditor. The debenture or any other document used to create a charge must comply with execution requirements provided in the Companies Act, 2002 (‘Act’). Under the debenture, the creditor is given proprietary interest over the company’s assets by way of security. Proprietary interest provided by way of security entitles the creditor to resort to company property for the purpose of satisfying liability due to him and the owner of the property retains an equity of redemption to have to have the property restored to him when liability has been discharged.
The charges created by a Tanzanian company must be delivered to the Registrar of Companies for registration within fourty two (42) days of the date of their creation (section 96 of the Act). Section 97(1) of the Act lists down the charges to which section 96 applies and the minister responsible for trade has powers to amend this list by removing or adding the charges which are required to be registered. Failure to deliver to the Registrar of Companies for registration within forty two (42) days of the creation of the charge the prescribed particulars, together with instrument, if any, by which the charge is created or evidenced, makes the charge void against the liquidator or administrator and any creditor of the company, and renders the company and every officer who is in default to a fine. When the charge becomes void, the money secured becomes immediately payable. Registration requirements apply to a foreign company if that company has an established place of business in Tanzania and the security is over the property that is in Tanzania. Part XII of the Act requires a company incorporated outside Tanzania to deliver prescribed documents and details to the Registrar of Companies when it is establishing a place of business in Tanzania.
The remedies available to chargee include appointment of a receiver, putting the company under administration and liquidating the company.
Pledge and Liens
A pledge is a form of possessory security available under the Law of Contract Act Cap. 345. Although it is now common practice in Tanzania for borrowers to pledge shares to lenders, share pledge remains equitable until the transfer of shares has been registered. Under section 128 of the Law of Contract Act, Cap. 345, the pledgee has power of sale in the event of a default on the secured obligations.
Lien is recognized as a security interest under section 123 of the Law of Contract Act, Cap. 345. A lienee has no power of sale in the event of a default on the secured obligations. If the power of sale is to be exercised, the lienee must bring an action in court with a view to obtaining orders allowing him to sale. If the power of sale is to be exercised over land, the provisions of the Land Act, 1999 must be observed.
There are no special documents and execution formalities required for pledges and liens apart from execution requirements by companies under the Companies Act, 2002 and execution of documents relating to land under the Land Act, Cap. 113. The registration of other security interests such as pledge and lien is not compulsory. However, in most cases, pledges and liens are registered under optional registration system provided by the Registration of Documents Act, Cap. 210. The optional registration puts on notice the members of the public about the existence of security interests.
Exchange control
Under Tanzanian law, if the payment relates to transfers in respect of debt servicing, the relevant contract as approved by a commercial bank must be produced plus creditor’s demand notes to that effect. Foreign exchange control laws require that interest rate in the loan agreement to reflect the prevailing market conditions for relevant currency of borrowing. Moreover, foreign exchange laws require that repayment period in the loan agreement should be tied to the ability of the project to generate enough funds to service the loans in a progressive manner. The loan agreements should not include conditions requiring opening of foreign currency accounts with banks not registered in Tanzania.
Tax on interest
Income tax is chargeable on remittances of investment returns and interest payable on loans. If a creditor is not a resident in Tanzania, the payment of income tax is normally done in a form of ‘withholding tax’. Currently, the withholding tax rate for non-residents is ten percent.
Transfer pricing
One of the deductible expenses in calculating the project company’s taxable income is interest expense. The revenue authorities may, basing on the transfer pricing provisions in the Income Tax Act, 2004, refuse to allow the deduction of interest expense if it is unreasonably higher than the prevailing market conditions.
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