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The European, Middle Eastern and African Restructuring Review 2017

Overview: OHADA Uniform Act on Insolvency and Restructuring in Africa

Introduction

Since the adoption in Port Louis, Mauritius, of its founding treaty on 17 October 1993, OHADA1 has established through the Uniform Acts a cross-border regime of uniform laws regulating most areas of business law, including insolvency proceedings.2 Like EU regulations, the Uniform Acts are immediately applicable in all OHADA member states and prevail over national laws in case of conflict.

Specifically, insolvency proceedings in all member states are now regulated by the revised Uniform Act organising insolvency proceedings (R-UAI)3 adopted on 10 September 2015 by the Council of Ministers of OHADA, which was published in the OHADA Official Gazette on 25 September 2015 and entered into force on 24 December 2015. Underlying the R-UAI is a clear willingness to modernise and clarify the rules governing OHADA insolvency proceedings, by speeding up and improving the efficiency of such proceedings. The stated objectives are to preserve debtors’ economic activities and levels of employment, facilitate the safeguard of viable companies and establish a precise payment order of creditors.

Key innovations of the R-UAI

The key improvements introduced by the R-UAI are its broader scope of application, the creation of simplified proceedings, the introduction of a conciliation procedure, the creation of a ‘new money’ privilege, the creation of a legal framework for receivers, the introduction of mandatory deadlines for the implementation of the proceedings and the introduction of a new regime for cross-border insolvency proceedings.

A broader scope for the R-UAI and definition of key concepts

The scope of application of the R-UAI has been clarified, and it now clearly applies to any natural person carrying out independent, civil, commercial, artisanal or agricultural activity, any legal person, including public entities having the form of a private legal person and private legal entities conducting a regulated activity (eg, credit institutions, micro-finance companies, actors in the financial markets, and insurance and reinsurance companies).

The R-UAI further provides for a definition of the key concept of cessation des paiements (cash-flow insolvency), which is now defined as the state in which a debtor is unable to pay its outstanding liabilities with its current assets. There is no suspension of payments if the debtor is in a position to meet its outstanding liabilities with the undrawn credit facilities or differed payment terms it enjoys from its creditors. As is the case under French law, this concept is pivotal in determining which of the proceedings detailed below are available to a company facing financial difficulties, making this a welcome improvement for practitioners.

However, other key notions such as the ‘irremediably compromised situation’ (the turning point between the judicial recovery and winding-up proceedings) and ‘serious financial or economic difficulties’ (the occurrence of which enables the debtor to apply for preventive settlement proceedings) are not defined.

Simplified proceedings for small businesses

Small business entities4 can now be subject to simplified preventive settlements, judicial recovery, and winding-up with simplified conditions of application and opening, and shorter durations compared with the standard proceedings.5

A new preventive proceeding: the conciliation

The R-UAI introduces a new consensual and confidential preventive procedure, the conciliation. Strongly inspired by its French counterpart, this procedure applies to companies that are facing actual or foreseeable difficulties but are not yet cash-flow insolvent. The conciliation is aimed at reaching an amicable settlement with the main creditors before the relevant company is cash-flow insolvent.

‘New money’ privilege

Another major improvement of the R-UAI is the establishment of a ‘new money’ privilege benefiting certain creditors who provide financial support to a debtor in the context of an amicable settlement, a preventive settlement or a judicial recovery. Indeed, creditors who made available to a debtor fresh cash contributions,6 goods or services to ensure the continuity of its activity as part of a ratified amicable settlement, a ratified preventive agreement or a ratified judicial recovery agreement, will, in the context of a subsequent winding-up initiated against such debtor, be preferred to all other creditors.

A new legal framework for receivers

The R-UAI introduces a comprehensive legal framework for receivers (ie, the experts and the syndics) aimed at ensuring the competence, skills and ethics of these court-appointed professionals whose role is instrumental in the proper conduct and outcome of any insolvency proceedings. The R-UAI strictly regulates the terms of appointment and conditions under which they operate, provided that each member state can implement additional eligibility requirements.

A new cross-border insolvency regime

Insolvency proceedings initiated within a member state were already automatically recognised within the territory of other member states. The R-UAI has now provided for a new regime largely based on the model law of the United Nations Commission on International Trade Law (UNICITRAL) on cross-border insolvency. This new regime clarifies the effects of such recognition and the extent of the cross-border cooperation between the main participants and authorities involved in cross-border proceedings and provides for the recognition of insolvency proceedings opened outside the OHADA jurisdiction.7

Main features of OHADA insolvency proceedings

There are four insolvency proceedings available to debtors under the R-UAI and these can be divided between preventive and curative proceedings.

Preventive proceedings

Conciliation (amicable settlement)

As stated above, this is a confidential procedure8 that provides a debtor experiencing actual or foreseeable difficulties (but that is not yet cash-flow insolvent) the opportunity to reach an amicable settlement with its main creditors through an amicable settlement agreement.

A conciliation can be opened at the debtor’s request (or at the joint request of the debtor and one or more of its creditors) filed with the competent court, describing the debtor’s difficulties and the contemplated means to face them and containing corporate and financial information evidencing the debtor’s economic difficulties.

If the president of the competent court decides to open such proceedings, he or she appoints a conciliator, who must be free of any conflict of interests with any of the parties (the debtor, its creditors or counterparts) and whose role is to promote the signature of an amicable settlement agreement between the debtor, its main creditors and regular counterparts. The duration of the conciliation is limited to three months, with a possible one-month extension at the debtor’s request.

During the negotiation of the amicable settlement agreement, legal proceedings are not automatically suspended, but the president of the competent court may, at the debtor’s request and following the opinion of the conciliator, postpone or suspend payment requests or claims brought by a creditor involved in the conciliation.

If an amicable settlement agreement is reached, all legal proceedings or individual payment claims are suspended or prohibited for as long as the amicable settlement agreement is not terminated.

Preventive settlement

The preventive settlement is available to debtors having serious financial or economic difficulties, provided that they are not cash-flow insolvent.

A preventive settlement can be opened at the debtor’s request (or at the joint request of the debtor and one or more creditors) filed with the competent court, describing the debtor’s financial and economic difficulties, the prospects for recovery and the contemplated means to discharge liabilities and containing a draft preventive arrangement detailing the measures aimed at the continuity and financing of activities (eg, grace periods, write-offs, disposals) and employment prospects.

If the president of the competent court decides to open such proceeding, it will appoint an expert (who is subject to the new legal regime governing the appointment of receivers), whose role is to promote the signature of the preventive arrangement (on the basis of the draft submitted by the debtor) and issuing a report on the arrangement reached between the parties.

The opening of a preventive settlement has three main effects: (i) all individual legal actions (including enforcement and preventive actions) brought against the debtor for the payment of pre-existing debts are suspended and prohibited (and natural persons who granted a security can benefit from such suspension or prohibition); (ii) legal, contractual and default interests continue to accrue but become unenforceable; and (iii) the debtor is, in principle, prohibited from paying pre-existing debts, making disposals outside the ordinary course of business and granting security or repaying any security grantor. However, the creditors can rightfully terminate any agreement entered into with the debtor, to the extent legally and contractually entitled to do so.

If upon submission of the expert’s report, the court decides to ratify the preventive arrangement (including grace periods and write-offs granted by all or part of the creditors), it becomes binding on all pre-existing creditors (ordinary and secured creditors). Natural persons who granted a security can also benefit from such grace periods and write-offs and any enforcement of security interests is frozen until the termination or cancellation of the preventive arrangement.

If the court rejects the preventive arrangement, the suspension or prohibition of enforcement of security and actions for payment will automatically be cancelled and the parties returned to their initial situation.

There is no express maximum duration for the preventive settlement, but in practice, it should not exceed four months, since the expert appointed by the court must report on the arrangement reached between the parties within three months (with a possible one-month extension) of the opening order and individual legal actions for payment by the creditors are only prohibited for the same duration.

Curative proceedings

Judicial recovery

Judicial recovery is available when the debtor is cash-flow insolvent and can be applied for either by the debtor, a creditor or the court itself. It is aimed at reaching a recovery arrangement that will organise the safeguard of the debtor’s business and the repayment of its debts.

Within 30 days of becoming unable to pay its outstanding liabilities with its available assets, the debtor must file a statement of insolvency with the competent court, accompanied by certain corporate and financial information. With such filing (if made by the debtor) and in any case, no later than 60 days after the opening order, the debtor must file a draft recovery proposal detailing its recovery prospects (notably in terms of financial and economic indicators) and setting out the steps contemplated to achieve such recovery (grace periods, debt write-offs, share capital increases and conversion of debt into equity, differentiated treatments between creditors).

If the court decides to open the proceedings following a hearing of the debtor and any other person it deems necessary, it will determine the date as from which the debtor was cash-flow insolvent within the 18-month period preceding the court’s ruling, provided that such date can, in principle, not be earlier than the date of ratification of the preventive arrangement (if any). The period between the date as from which the debtor was actually cash-flow insolvent and the date of the court’s ruling constitutes what is known as the hardening period. The court will also appoint up to three syndics (whose main role is to represent the creditors, safeguard the debtor’s rights and assist the latter in the administration of its business) and one supervising judge (whose main role is to supervise the actions of the syndics).

The opening order suspends and prohibits (for the benefit of the insolvent debtor and natural persons who granted security) all payment actions against the debtor, the termination of any pre-existing agreement as a result of payment default, any security enforcement action and any distributions to shareholders.

The opening of judicial recovery proceedings does not result by itself in the termination of ongoing contracts (but the syndics can decide to terminate them). However, the registration of security interests is suspended, interest on loans having a maturity of less than a year ceases to accrue (such suspension of interest also benefits natural persons who granted security) and any decision of the debtor relating to the administration and disposal of assets must be taken with the assistance of the syndic in order to be enforceable against creditors. Further, certain actions of the debtor during the hardening period (as defined above) are not (by law9 or upon decision of the court10) enforceable against the pool of creditors.

To be approved, the draft recovery arrangement must be voted by a majority of the admitted unsecured creditors representing at least 50 per cent of the total amount of liabilities. If approved, the recovery agreement is automatically ratified by the court, otherwise the court shall convert the judicial recovery into a liquidation winding-up.

Secured creditors benefiting from security over the debtor’s assets do not lose their security interests but are prevented from enforcing them until the termination or cancellation of the recovery agreement.

The duration of the judicial recovery cannot exceed six months from the opening order. Such period can be extended once for an additional three-month period, at the expiration of which the proceedings will automatically be converted into a winding-up.

Winding-up

Winding-up is a legal regime aimed at selling all the debtor’s available assets to allow a discharge of its liabilities.

These proceedings are applied where the debtor is cash-flow insolvent and its situation is irreversibly compromised. It can be applied for by the debtor, at the request of a creditor or by the court itself.

When at the debtor’s request, the latter must file with the competent court a statement of insolvency within 30 days as from the date it becomes cash-flow insolvent.

When deciding to start the winding-up proceedings, the court will fix the term of such proceedings (which cannot exceed 18 months from the opening date, with a possible six-month extension) and the date as from which the debtor was cash-flow insolvent subject to the limits mentioned in the section on ‘Judicial recovery’, supra.

If, within three months after the decision opening the proceedings, the syndic has not repaid the liabilities secured by a pledge over the debtor’s assets (whether moveable or immoveable), or commenced the process to achieve the same, the secured creditors will be entitled to exercise or recover their individual legal actions.

As from the decision to start the winding-up, interest on loans (regardless of their maturity) ceases to accrue, unmatured claims of the debtor are automatically accelerated in relation to the debtor (thus excluding guarantors and joint obligors of the debtor). The debtor is also prohibited from taking any decision relating to the administration and disposal of its assets, whether present or future. However, creditors who have provided fresh cash contributions to the debtor shall benefit from the privilege of ‘new money’.11

Continuation of the debtor’s business during the proceedings may be authorised by the court on an exceptional basis, and only if this continuation is required in the interest of the public or of the creditors.

The sole outcome of the winding-up is the sale by the syndics of all the debtor’s available assets to discharge its liabilities and the allocation of the proceeds of the enforcement of the assets, if any, to the creditors according to the order of priority that was clarified by the R-UAI.

Outlook

The R-UAI is undoubtedly a significant step in demonstrating the willingness of the member states to adopt a more modern and balanced insolvency regime that contains incentives for both debtors and creditors. The compliance by all stakeholders with the mandatory deadlines introduced by the R-UAI to speed up the proceedings will be pivotal for the success of this new regime that takes into account best international practices.

Notes

  1. OHADA stands for ‘Organisation pour l’Harmonisation en Afrique du Droit des Affaires’ (Organisation for the Harmonisation of Business Law in Africa). It currently comprises 17 sub-Saharan member states. Almost all OHADA member states are francophone (except for the Republic of Guinea-Bissau and Equatorial Guinea) and use the euro-pegged CFA franc currency (except for the Republic of Guinea and the Democratic Republic of Congo).
  2. To date, nine Uniform Acts have been adopted and published for insolvency proceedings, security interests, commercial law, arbitration, companies, cooperatives, transportation of goods, enforcement proceedings and accounting.
  3. The R-UAI replaces the initial Uniform Act organising collective insolvency proceedings dated 10 April 1998 (published in the OHADA Official Gazette on 1 July 1998). The adoption of the R-UAI is part of an ongoing process of reforming the Uniform Acts undertaken by OHADA with the blessing and active involvement of international institutions such as the World Bank. To date, revised Uniform Acts on security interests, on companies and on commercial law have been adopted and published and the Uniform Act on arbitration is in the process of being revised.
  4. Small business entities are defined as sole proprietorships, partnerships or other non-public legal entities in which the number of employees is less than or equal to 20, and whose turnover does not exceed 50 million CFA francs, excluding taxes, in the 12 months prior to referral to the competent court under the R-UAI.
  5. For example, the maximum duration of a simplified preventive settlement is two-and-a-half months, while a standard preventive settlement can last four months (see below).
  6. Excluding share capital increase and debt made available pursuant to a pre-existing arrangement.
  7. The recognition of these proceedings can be subject to a decision of a competent court in the relevant member state and can be denied if it is contrary to public policy in the relevant member state. 
  8. The decision of the president granting or rejecting a request of conciliation and the content of the amicable settlement agreement are confidential.
  9. Eg, transfer of assets for free, entry into unbalanced contracts detrimental to the debtor or granting of any security to secure a pre-existing debt. 
  10. Eg, transfer of immoveable assets for free during the six-month period preceding the hardening period.
  11. See the section on ‘Simplified proceedings for small businesses’, supra.