CLYDE & CO UPDATER - THE ISSUE OF CORPORATE GUARANTEES TO FOREIGN ENTITIES

In this month’s legal briefing we focus on the issue of corporate guarantees by Tanzanian entities to foreign entities.

The essential elements of a valid and enforceable corporate guarantee

In transactions where the principal debtor is a subsidiary company or part of a group of companies, most creditors would prefer that a corporate guarantee be issued by the parent company or any other related company as part of the security to be furnished by the principal debtor. By issuing a corporate guarantee the parent company or any other related company, otherwise known as the guarantor, is providing assurance to the creditor that should the principal debtor default in its obligations (e.g. under a loan agreement) the guarantor will be called upon to honour the guarantee.

In Tanzania, a corporate guarantee (or any contract of guarantee), like every other contract, must satisfy all the essential elements of a valid contract, e.g. genuine consent, legality of object, competency of parties, etc. A corporate guarantee should also be supported by some consideration. No direct consideration is needed between the guarantor and the creditor, as the consideration received by the principal debtor is sufficient for the guarantor.

Furthermore, the ability of a Tanzanian company to guarantee the repayment obligations of another company is subject to the following:

1. the powers of the company as set out in its memorandum and articles of association (that is, whether it has a specific power to guarantee the repayment obligations of other companies or a general power to do business which is broadly enough drafted to cover such an act); and
2. the requirements for the directors to act in good faith and in the best interest of the company issuing the guarantee (the corporate benefit requirement).

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