1.0 INTRODUCTION
With economic growth, there has been a shift from sole proprietorship to the formation of more companies, largely because it offers businesses greater opportunities to scale, innovate and expand. Periods of economic growth, characterized by rising demand, higher incomes and technological progress, createconditions where larger and more intricate business structures can flourish. Economic growth is thus linked to the formation of numerous businesses, such as companies. This economic growth, as observed in Tanzania, has attracted local and foreign investors to establish companies across various sectors.
To meet managerial and compliance obligations, foreign investors planning to invest in Tanzania are encouraged to include local individuals in their company’s management. These obligations include obtaining Tax Payer Identification Number (TIN), tax clearance and having a local person when opening a company bank account. Therefore, some companies appoint local persons as directors to meet these requirements.
In recent times, Tanzania has seen the arbitrary or non-procedural removal of company directors from their roles. This trend has become more prominent now than in the past, when there were fewer companies, many of which were family-owned. The practice of dismissing company directors without following procedures has reportedly disrupted the functioning of certain companies. This article focuses on proper procedures for removing a company director without disrupting the company’s operations, the legal consequences of removing a director without following proper procedures and remedies if a company director is unlawfully dismissed.
To facilitate a clear understanding of this article’s central theme, it is imperative to first define the key term discussed herein, as explained below:
According to section 2 of the Companies Act, Act No. 12 of 2002, herein referred to as “the Companies Actor the Act”, the term “director” encompasses anyone holding the role of a director, regardless of the title used. Essentially, a company director is an elected or appointed individual who oversees a company’s operations and makes decisions regarding its management. The Companies Act stipulates certain legal duties and responsibilities for directors. Section 186 requires each company to have at least two directors. Section 182-185 of the Act assign responsibilities to company directors, including the obligation to act with honesty and in the company’s best interests, to consider the welfare of employees, to use their power for legitimate purposes and to uphold a duty of care.
2.0 PROCEDURES FOR REMOVING COMPANY DIRECTORS BEFORE EXPIRATION OF THEIR TENURE
The Companies Act, as well as the Memorandum and Articles of Association, govern procedures for removing company directors in Tanzania. Under section 193 of the Companies Act, a company has the authority to remove a director from their role if there is dissatisfaction with their performance, regardless of any stipulations in the company’s articles of association or any contract between the company and the director.
From this provision, the removal of a director requires observing the following procedures:
- The company must issue a special notice of the intended resolution to remove a director,
- The company shall deliver the notice to the director concerned,
- The director shall have the right to be heard on the resolution at the meeting.
The company must adhere to these outlined procedures before dismissing the director from their position. The. The use of “shall” renders these procedures mandatory obligations. The High Court of Tanzania upheld this position in the case of Douglass Elie Rugina v Mwasiti Ally Mpoto and Another, Misc. Commercial Cause No. 35 of 2022. Page 7 of the judgment states:
“……section 193 (1) of the Companies Act [Cap 212 R. E 2002] provides that directors may be removed from office before expiration of their tenure in office by ordinary resolution. Section 193 (2) of the Act requires special notice to be issued to remove the director. And section 193 (3) of the same Act provides that if the special notice (notice for special resolution) is given, the director to be removed should make a representation. That is, s/he ought to be afforded the right to be heard.”
This position was cemented earlier on in Korduni Meliyo v Arusha Aviation Services Limited, Misc. Civil Cause No. 2017, where the High Court of Tanzania ruled that the removal of a director from their role must be preceded by the issuing of a special notice of the intended resolution, which shall be served to the director in question, with the right to be heard on the resolution at the meeting.
3.0 REMEDY FOR IMPROPER REMOVAL OF THE COMPANY DIRECTOR FROM THEIR POSITION
Under section 233(1) and (3) of the Companies Act, any company member is entitled to submit a petition to the court for relief if they believe that the management of the company’s affairs is or has been conducted in a manner that is unfairly detrimental to the interests of its members, whether in general or to a particular group that includes the petitioner. This also applies to situations where a proposed or actual act or omission by the company or by someone acting on its behalf is or would be unfairly prejudicial to those interests.
The High Court of Tanzania took this position in the Douglass Elie Rugina v Mwasiti Ally Mpoto and Another (above). The High Court declared that the law permits a company’s director, shareholder, or member to approach the court whenever they believe that the company’s affairs are conducted unfairly, causing harm to that member, shareholder, director or the company itself. This clause offers an avenue to directors who have been removed from their positions without proper procedure to petition the court, requesting that the company be ordered to cease doing the act concerned. The High Court in Chen Kai v Hutao and 2 Others, Misc. Civil Cause No. 28765 of 2024 succinctly summed up this position:
“…Under that provision the law allows the director, shareholder or a member of a company to petition to the court whenever they see or feel that the affairs of the company are unfairly conducted to the detriment of that member, shareholder, director or the company itself to petition for unfair prejudice proceedings.”
Court decisions and practice have demonstrated that a director who has been removed from the directorship in the company may institute an application under Section 193 (3) of the Companies Act. This application seeks a court order to overturn the company’s decision to remove them, ensuring adherence to the legally established procedure. It is noteworthy that section 233 of the Companies Act grants not only shareholders or company members the right to petition the court when their interests or the company’s interests are adversely affected but also provides company directors with the same opportunity to seek a court order.
4.0 LEGAL CONSEQUENCES FOR NOT ADHERING TO THE PROCEDURES FOR REMOVING THE DIRECTOR
If the essential procedures for removing a company director are not followed, the court will declare any decision taken to be illegal and thus invalid. In Korduni Meliyo v Arusha Aviation Services Limited (above), the High Court underscored the critical importance of observing procedural fairness when removing directors. The Court found that the petitioner and his co-director were removed without being informed, involved or given an opportunity to participate in the meeting that led to their removal. This complete lack of engagement breached their right to be heard, which is a fundamental principle of natural justice. Because of this procedural violation, the court concluded on page 8 that the removal process was unfairly prejudicial to affected directors. Significantly, the Court declared that all decisions and resolutions the company made following the directors’ unlawful removal were invalid. This case illustrates that any corporate decision made after a flawed removal process can be legally challenged and nullified.
In the case of Gabriel Ponsiani Makundi v S.E.C (East African) Co. Limited & 4 Others, Misc. Commercial Cause No. 65 of 2023, the High Court once again reaffirmed the necessity of strictly following corporate governance procedures when removing directors. In that case, the petitioner received a letter claiming to terminate his directorship without formal board meeting or resolution. The Court ruled that a mere written communication could not remove a director unless there was a proper meeting and a valid resolution passed according to the law and the company’s articles of association. Since these procedures were not followed, the Court ruled that the petitioner remained a legitimate director of the company.
The jurisprudence of these cases reinforces the key legal principle that a company director cannot be removed arbitrarily without due process. A company must respect the law and its governing documents. Any non-compliance renders the removal ineffective and taints any subsequent decisions taken with illegality. These cases underscore that corporate governance requires transparent and lawful actions to preserve the legitimacy of company operations and to protect the rights of stakeholders.
5.0 CONCLUSION
In Tanzania, a company director can be removed from his position through several avenues, including shareholder resolution, court orders and the director’s own voluntary resignation. The Companies Act outlines specific procedures for removal, emphasising the need for special notice from shareholders and a formal resolution passed in a meeting. The process is initiated by a special notice from any shareholder of the company, indicating the intention to remove a particular director. The company sends the notice to the director. The director will have the right to defend himself in writing within a reasonable time.
Following the recent trend of removing company directors without following proper procedures, companies are advised to strictly adhere to the due process, ensuring fairness and transparency with a clear and accessible removal process, guaranteeing that the director is given sufficient notice and an opportunity to be heard and appealing when dissatisfied. Compliance will prevent unnecessary tensions and expensive litigation, thereby ensuring smooth operations and meeting the intended goals within the defined period.
