Generally, a Shareholder or Director cannot automatically sue on behalf of a company in Tanzania. However, the same can be done in exceptional circumstances because the company is considered a separate legal entity which can sue and be sued in its capacity.
A legal position is that a company, as a separate legal entity from its members, can sue or be sued on its behalf was established in the historic decision in Foss Vs. Harbottle [1843] 2 HARE 461. That decision categorically stated that if a wrong has been inflicted on a company, the proper plaintiff is the company itself. However; there is a common law right reserved for shareholders to sue the wrongdoers on behalf of the company by way of derivative action under limited circumstances. This provides an important remedy for minority shareholders.
In corporate litigation, confusion often arises when an individual or corporate shareholder does not respect the separateness of the corporation in which they own shares and jeopardize the rights or places other members in legal liabilities which could have been avoided.
As stated earlier that the general rule is that each corporation is a separate legal entity. It must enter into contracts in its name and sue or be sued in its own name. However, under exceptional circumstances, this general rule can be dispensed with and necessitate the need to ‘pierce the corporate veil’ to identify the wrongdoers and responsible people behind a certain action as shall be illustrated below.
Possibility of Suing on Behalf of a Company in Tanzania
Under sections 233 and 234 of the Companies Act, Cap. 212 RE: 2002, there is an avenue whereby an individual shareholder or Director may, upon leave of the court, bring an action in a court of law on behalf of a company for derivative action that either the affairs of the company are conducted unfairly prejudicial to the interest of its members. The action is by way of Petition, provided that the leave of the court has been sought. Upon petition, the court may authorise civil proceedings to be brought in the name and on behalf of a company and on such other terms as the court may direct against any person (section 233 (3) (c) and 234 of the Companies Act, Cap. 212)
Therefore, for easy understanding, the shareholder or director can sue on behalf of the company under direct action. The action has to be brought by way of a petition in a court of law. The leave of the court in that regard is of utmost importance. However, it has to be borne in mind that there should also have to be a Company resolution allowing a shareholder or Director to sue on behalf of a company. The following cases have tried to discuss about derivative action:
- TIB Development Bank and another vs House and Homes Limited and six others Misc. Commercial Application No. 72 of 2021
- The National Investment Company Limited “NICOL” vs The Registered Trustees of the Public Services Pension Fund (PSPF) and 5 Others, Misc. Commercial Application No. 288 of 2014.
- Foss v Harbottle [1843] 2 Hare 461
Generally, the legal protection of shareholders’ rights is recognised as an essential element of corporate governance. In particular, the law allows shareholders to bring lawsuits against Directors when they feel Directors inappropriately exploit their positions of control. They may also bring a lawsuit against any person whom they feel is prejudicing the affairs of the company. The right they exercise is technically known as a derivative right.
Therefore, as the world is growing into a corporate society, no wonder corporate governance must also be strengthened by allowing shareholders or Directors to institute a lawsuit on behalf of a corporation. This will bring about a sense of governance responsibility and accountability which is healthier for the development of corporate governance.
Disclaimer:
This Article has been prepared for general guidance on matters of interest only and does not constitute professional advice. It would be best if you did not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty, express or implied, is given as to the accuracy or completeness of the information contained in this publication and, to the extent permitted by law. AVC & Partners (Advocates), its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining from acting, in reliance on the information contained in this publication or for any decision thereto
