Mandatory Change in Equity due to Losses under the OHADA Uniform Act on Commercial Companies
By Jacob A. Akuo & Agbor Regina Ebob
The pandemic has terribly affected the bottom line of many corporations around the world, the OHADA area included. For a number of companies that we have assisted in corporate matters during the past two years, we have noted that management reports and financial statements by both internal and external auditors have shown their accounts are in the red due to enormous losses during the last two years.
To stop the bleeding and stay afloat, several companies we have assisted have resorted to incorporating reserves (for those who had reserves) while others have further leveraged themselves in the hopes that we were rounding the corner with the pandemic following the advent of vaccines and effective treatments. But this has not quite panned out as they thought.
The dawn of vaccine resistant variants has thrown a monkey wrench into many a corporate strategy in that, there have been return to stricter measures such as more lockdowns, social distancing, etc., which have ricocheted into supply and value chain disruptions, decreased consumption and reduced productivity.
Furthermore, there is also the problem of increased global inflation rates leading to a sharp drop in spending. To tackle the inflation problem, some policymakers and central banks have advocated for and resolved to increasing interest rates. This has resulted in the tightening of the screws on overly leveraged companies. Smaller economies like Cameroon which could not bail out their corporations during the first major wave of COVID19 have thus seen many small and medium sized companies and even some major corporations fall into administration or wind-up altogether.
Against this backdrop, we thought we highlight the regulatory requirements under the OHADA Uniform Act on Commercial Companies and Economic Interests Groups about the mandatory steps that must be taken by corporate management where the summary financial statements of the company show enormous losses. It should be clarified that these measures do not relate to companies that are undergoing bankruptcy (administration and liquidation) proceedings under the OHADA Uniform Act on Collective Proceedings for the Clearing of Debt.
For starters, Article 664 of the Uniform Act provides that, where as a result of losses recorded in the summary financial statement of the company, the equity of the company has been reduced to less than half of the stated capital (registered capital) of the company, the company must call an extraordinary meeting of shareholders within four months following the ordinary general meeting that approved the financial statement. The purpose of the extraordinary meeting shall be to determine whether there shall be an early dissolution of the company.
It should be stated that, the reason why the OHADA Uniform Act provides for an extraordinary meeting as the preferred meeting to conduct these proceedings and make these decisions is because the extraordinary general meeting is the only meeting that has the authority or power under the OHADA Uniform Act to increase or decrease the obligations of shareholders and to amend the articles of association of the company.
That said, it may happen that during this extraordinary general meeting, shareholders are opposed to declaring the early dissolution of the company. In this case, the Uniform Act requires that, within a period no later than the close of the second fiscal year following that in which the losses were recorded, the shareholders reduce the company capital by an amount at least equal to the amount of losses that could not be posted against retained earnings. That is to say if within that period, the equity has not been restored up to a value of at least equal to half of the stated capital. The decisions of this extraordinary general meeting must thereafter be filed with the companies’ registry at the headquarters of the company and shall be published in the official journal/gazette or in a newspaper authorized to publish legal notices.
It may also happen that, the company either fails to convene the extraordinary general meeting to deliberate on the measures as described above, or convenes the meeting, but fails to secure a consensus as to whether the company should be dissolved or the capital reduced to reflect the losses. In these circumstances, the Uniform Act provides that the interested shareholder may seize the competent court requesting for an order for the dissolution of the company or reduction of the share capital to reflect the losses.
Once the competent court is seized as indicated above, it may grant the company a period of six months to regularize the situation before hearing on the application on the merits. Where the situation is regularized before that six-months period prior to hearing on the merits, the court cannot order the dissolution of the company.
In conclusion, there are a lot of companies that are facing this situation that do not understand the way forward. That is notwithstanding the Uniform Act on Collective Proceedings for the Clearing of Debt which provides for three main ways in which a company can restructure its debt including preventive settlement, administration and liquidation.
The information in this article is provided for informational purposes only, and should not be confused as legal advice on any matter. For proper legal advice, we recommend that you contact us directly (firstname.lastname@example.org or call +237 243 807 359) or request legal advice from your legal counsel.
Corporate law covers all the rules applicable to the creation, life and dissolution of civil and commercial companies. In order to carry out a commercial, industrial or craft activity, it is necessary to create a company. However, the choice of the legal form of the company requires special consideration, which is why it is essential to consult lawyers with expertise in corporate law.
Dayspring Law Firm assists investors and corporates throughout all this process, including: incorporation and registration of companies, during the company’s life and amendments of its articles of association (change of name, transfer of registered office, transformation, etc.), drafting of shareholders’ agreements, legal consultation in share purchase/transfer transactions, preparation and holding of boards of directors and general meetings of companies, transfers, transformations, acquisitions, mergers/absorptions of companies, due diligence, approval of annual financial statements and accounts, acts relating to amendments of the articles of association of the company, restructuring of companies and groups of companies, resolution of conflicts between shareholders, assisting clients regarding disputes relating to the validity of company decisions, drafting of documents including articles of association, minutes of general meetings, corporate contracts, commitments, etc., choice of appropriate legal structures, legal monitoring, legal audit, legal assistance on free allotment of shares, corporate taxation, transfer pricing, etc.