COVID-19 crisis in Sub-Saharan Africa
Points of attention in OHADA Law
The shock caused by the COVID-19 crisis on the economy of countries in Sub-Saharan Africa is unprecedented. In those difficult but crucial times, it is important for companies and investors in the OHADA region to be aware of the aspects of OHADA law that are relevant in a crisis context.
Whist the coronavirus pandemic seems to be less harmful in Sub-Saharan Africa than in other regions in the world, the crisis caused by COVID-19 is hitting the economies of the countries in the region hard. The whole region is suffering from the consequences of the virtual paralysis of economic activities and a drastic fall in the prices of oil and raw materials linked to a sharp drop in global demand. According to the IMF's Regional Economic Outlook for Sub-Saharan Africa of April 2020, a 1.6% contraction of the regional economy is forecast for the year 2020, which is the worst result ever recorded for the region.
These financial difficulties have a direct impact on companies of all sizes that form part of the region’s economic fabric, from large groups’ subsidiaries to local small and medium-sized enterprises.
The OHADA (Organisation pour l’Harmonisation en Afrique du Droit des Affaires – Organisation for the Harmonisation of Business Law in Africa) organisation, through the OHADA Uniform Acts, has put in place business law rules which are directly applicable in the seventeen Member States of the OHADA, those being the states of the CFA Franc Zone, the Democratic Republic of Congo, the Comoros and Guinea Conakry. Here we can address two problematics that are covered by OHADA law which are relevant in the context of this crisis:
- Duties and responsibilities of a manager (dirigeant). In this unprecedented and uncertain context, company managers are called upon to make crucial decisions regarding the company’s activities and continuity. In that respect, it is important for each of them to bear in mind the duties and responsibilities implied by their function.
- Collective proceedings (procédures collectives). In addition, the risk of insolvency of companies active in a number of sectors such as mining, agriculture or construction is significant. In this respect, it seems appropriate for us to address the different procedures for business rescue provided for in the OHADA Uniform Act organising collective proceedings for the clearing of debts (the Uniform Act on Collective Proceedings).
In a crisis situation, another challenge for the company is the management of its staff. The absence of the long-awaited OHADA Uniform Act relating to labor law is regrettable. It would have facilitated the visibility of pan-African groups with regard to the regulations applicable to collective dismissal and part-time work, for example. It will now therefore be necessary to analyse the local labor law of the relevant jurisdiction. In this regard, it should be noted that a number of OHADA states provided for specific regimes in the context of the COVID-19.
1. Responsibilities and duties as a manager
The OHADA Uniform Act relating to commercial companies and the economic interest group (the Uniform Act on Commercial Companies) is the most relevant regulation here and applies to companies established in one of the seventeen Member States and their managers.
a) Liability regimes
We distinguish here between (i) civil and (ii) criminal liability.
(i) Civil liability
As a preliminary point, it should be noted that under the organ theory, the company acts through its organs and the decisions of the organ are only binding on the company. The organs and their members are not accountable for the commitments made by the company.
However, the Uniform Act on Commercial Companies provides that managers may be held individually or severally liable, both to the company and to third parties (including shareholders) for any fault they commit in the performance of their duties. A fault is defined as (i) any violation of the legal or regulatory provisions applicable to the company, (ii) any violation of the articles of association of the company, or (iii) any fault committed in the management of the company (mismanagement), namely any deviation by a manager in the management of the affairs of the company from what may be expected of a prudent and diligent manager placed in the same circumstances.
Other cases of liability are provided for in the Uniform Act on Collective Proceedings. While the rules foreseen in the Uniform Act on Commercial Companies only concern de jure managers (dirigeants de droit), i.e. those formally appointed, the Uniform Act on Collective Proceedings also covers de facto managers (dirigeants de fait), i.e. persons who, without having been appointed as manager, behave as managers by actually interfering in the management of the company.
Among the cases of liability included in the Uniform Act on Collective Proceedings, it is worth mentioning the liability regime applicable to de jure or de facto managers whose fault contributed to a shortfall in the assets of the company in difficulty, in the context of business rescue (redressement judiciaire) or liquidation (liquidation des biens) proceedings. Those managers may be held liable for the company’s liabilities.
(ii) Criminal liability
The criminal liability of managers may also be invoked in a number of cases, including:
- when the company's managers have not called an extraordinary general meeting within four months after the approval of the summary financial statements to decide on the early dissolution of the company, whereas it appears from these financial statements that the company's net assets are less than half of the share capital;
- when managers make use of the company's assets or credit in a way that they know is contrary to the company's interest, for personal, material or moral purposes, or to favor another legal entity in which they have a direct or indirect interest. This offence is the misuse of company assets; and
- in a situation of cessation of payments, the de jure or de facto managers who would pay a creditor to the prejudice of the general body of creditors.
It should be pointed out that the penalties for these offences are determined by the national law of each of the Member States.
b) Duties of a manager
In order to avoid the risk of any potential liability, corporate managers must respect their duties as managers. These duties, the breach of which may give rise to the manager’s liability for mismanagement, are (i) the duty of loyalty, (ii) the duty of competence and (iii) the duty of diligence.
(i) Duty of loyalty
Each manager must act loyal to the company's interest, whether seen by the OHADA doctrine as the interest of the shareholders in its strictest sense or the interest of the company as a whole in its broadest sense. The latter interpretation seems to predominate among the authors. In a company that is part of a group, the requirement to act in accordance with the company's interest imposes on its managers, when making a decision, not to jeopardise the company’s interest for the benefit of those of another entity of the group or of the group in general. In this context, the approval of intra-group transactions that would impact the company's short- or medium-term liquidity must be analysed with the utmost caution by the management.
(ii) Duty of competence
Each manager must also manage the company competently, applying all of its technical and professional skills and experience to the direction and management of the company. In practice, this results in useful decisions that are adapted to the company and the proper management of the company's assets.
(iii) Duty of diligence
Each manager must also exercise diligence in the management of the company, which implies managing the company and conducting the company's affairs as a prudent and diligent manager. More practically, diligence requires, in the case of a collegial body, that it convenes as often as necessary. In the current context, it is important that the board convenes often enough to allow regular monitoring of the company's activities and financial health and to be able to take the necessary measures in a timely manner (e.g. sale of assets, obtaining external financing, etc.).
In particular, diligence, in our view, also requires managers in the current circumstances to keep themselves informed of the state measures put in place to support economic activities on their soil and to apply for available aid. Many States in Sub-Saharan Africa have introduced support measures. Côte d'Ivoire has set up a support fund for field crops such as rubber or cocoa, amounting to CFA Francs 250 billion. In the Democratic Republic of the Congo, the Fund for the Promotion of Industry (the “Fonds pour la Promotion de l’Industrie”) grants financing to enterprises at a zero rate to encourage the relaunching of economic activities.
Due diligence will also require managers to find out about key contracts entered into by the company and see which ones are being jeopardised by the economic consequences of the current crisis. On this basis, the company will need to take the necessary steps to ensure the survival of its vital business and banking relationships.
The exact scope of these duties is to be assessed on a case-by-case basis, taking into account the nature of the activities of the company and its size as well as the competences of the relevant manager.
2. Collective proceedings
The main purpose of the law of collective proceedings as established by the OHADA Uniform Act on Collective Proceedings is to rescue companies in difficulty. In the current context, both for companies in difficulty and for their creditors, it is important to bear in mind the various collective procedures existing under OHADA law.
While conciliation (conciliation) and preventive settlement (règlement préventif) concern a company that is not yet in a situation of cessation of payments, business rescue (redressement judiciaire) and liquidation (liquidation des biens) are applicable to companies that are in a state of cessation of payments, i.e. the companies that are unable to meet their outstanding debts with their available assets.
It should be pointed out here that the law of collective proceedings is very broad in its scope of application and covers any enterprise, i.e. (i) any natural person exercising an independent professional activity, whether civil, commercial, craft or agricultural, (ii) any legal person under private law and (iii) any public enterprise in the form of a legal person under private law.
a) Before cessation of payments - Conciliation and preventive settlement
The conciliation procedure is open to companies which are facing proven or foreseeable financial difficulties but which are not yet in a state of cessation of payments. The aim of a conciliation procedure is, with the help of a conciliator, to find an amicable agreement with the main creditors and co-contractors of the company, with a view to putting an end to its difficulties.
The preventive settlement is open to companies that justify serious financial or economic difficulties, without however being in a state of cessation of payments. It enables the company in difficulty to obtain the suspension of individual proceedings by proposing a preventive settlement agreement (concordat préventif) to be concluded between the company and its creditors in order to avoid any cessation of payments and protect unpaid creditors. An expert is appointed by the court to analyse the financial situation of the company and to facilitate the effective conclusion of such preventive settlement agreement.
b) After cessation of payments – Business rescue and liquidation
The company that is in a state of cessation of payments must file an application before the competent court to obtain the opening of business rescue or liquidation proceedings, within thirty days following the cessation of payments.
Business rescue or liquidation proceedings may also be initiated by a creditor with a certain, liquid and due claim against the company.
Business rescue aims at safeguarding the company and settling its liabilities through a rescue settlement agreement with creditors (concordat de redressement). The company in difficulty is divested from its assets as from the opening of the business rescue proceedings until the approval of such settlement agreement with creditors (or the conversion of the proceedings into liquidation) in favour of an appointed receiver (syndic). The receiver is responsible for making an inventory of the assets of the company in difficulty and facilitating discussions between the company and its creditors in order to reach a consensus on a settlement agreement with creditors. The draft settlement agreement with creditors must be approved by at least a majority of the company’s creditors representing at least half of the total claims in order to be subsequently approved by the competent court.
The liquidation of the company shall be pronounced by the competent court where there is no prospect of redress for the company in difficulty. The decision to liquidate a company shall also entail the dissolution of the corporate entity. A receiver shall be appointed to realize the assets of the company under liquidation and pay the creditors having regard to their rank.
There is no doubt that the effectiveness of these collective procedures will be put to the test in the coming months (and years). It will be necessary to keep an eye on the level of congestion in the courts, where collective proceedings are only effective if they can be conducted swiftly and within the legal deadlines.