Hardening periods under OHADA insolvency laws and the risks associated with amending security interests
The last decade has witnessed an increase in the flow of funds to finance projects located in OHADA jurisdictions. Loans are made either to a borrower incorporated in an OHADA jurisdiction, or to a parent company who then lends on the funds to its OHADA based subsidiary, but in most instances, loans are secured over project assets belonging to an OHADA incorporated company. Both lender and borrower must be mindful of the particularities of security interest granted by OHADA incorporated companies. This blog aims at analysing one such particularity, namely issues arising when the scope or amount of the security needs to be amended during its originally anticipated validity period.
Let us take a practical example: during the course of the life of a loan, the project may need further funding and the borrower and the lender may agree to amend the existing loan to increase its amount. The lender would then typically look to increase the scope of the obligations secured under the existing security.
For purposes of simplicity, the borrower and the lender may wish to proceed by way of a short amendment to the existing security documents. As simple and convenient as it may look, this solution is however not without risks, the most commonly perceived one being a possible impairment of the existing security, due to it being considered as a new security created during a hardening period.
What is a “hardening period”?
The concept of “hardening periods” essentially consists in a period of time during which transactions concluded by a company having entered a formal insolvency process may be challenged by an Insolvency Practitioner, a Court or creditors and eventually become unenforceable against third party creditors.
In OHADA jurisdictions, hardening periods (called “période suspecte” therein) are recognized and governed by the OHADA Uniform Act relating to insolvency laws (Acte Uniforme portant organisation des procédures collectives d’apurement du passif) dated 10 September 2015 (hereafter, the Uniform Act).
What type of transactions can be scrutinized during the “hardening period”?
The Uniform Act contains a list of the transactions that become unenforceable as of right against the general body of creditors if made during the hardening period. It includes, for example, gratuitous deeds of transfer of property, prepayment of debts which are not yet due, provisional registration of protective judicial mortgages or charges. It also specifically includes the grant of “any security in rem contractually granted to secure a debt previously contracted, unless it replaces a prior security of an at least equivalent nature and scope, or it is granted in consequence of an agreement anterior to the “cessation des paiements”“ (see below for the definition of “cessation des paiements”). 
Put more simply, the Uniform Act renders unenforceable any new security granted during a hardening period, and securing an anterior debt. This is meant to avoid a serious breach of equality amongst creditors as the grant of such new security has the effect of affording one specific creditor priority – and thus better chances - of payment, to the detriment of other creditors.
How is the duration of the hardening period determined?
Under the Uniform Act, the hardening period starts from the date upon which the company is unable to makes its payments when they fall due (cessation des paiements) and ends upon the date when the Court open insolvency proceedings of judicial recovery (redressement judiciaire) or liquidation of assets (liquidation des biens) in respect of the company (thereafter, the opening judgement date).
The date of cessation des paiements is first set by the Court on a provisional basis. The Court retains the power to vary such date during the course of the insolvency proceedings in the event that the cessation des paiements appears to have occurred at another date based on new evidence. However, the final established date of cessation des paiements can never be anterior to the opening judgment date by more than eighteen (18) months.
Accordingly, the date of cessation des paiements remains unknown until insolvency proceedings are formally opened and such date is finally set by the Court. Yet, if a security interest securing a former debt is created – or deemed created – after such date of cessation des paiements, it runs the risk of unenforceability due to having been granted during the hardening period.
In conclusion, to establish if a security interest is at risk of unenforceability, one needs to determine three (3) dates: 1. the date of creation of the security, 2. the date of creation of the debt secured by such security and 3. the date of cessation des paiements. It is noteworthy that this exercise may not be simple in particular when determining the date of creation of the debt or the date of creation of the security, and the numerous case laws – at least under French law which contains similar provisions – demonstrate the practical difficulties.
How does all this impact an amendment to existing security?
Let us get back to our practical example of amending existing security interest to increase the obligations secured thereunder. Because the amended security will necessarily secure new debt, it may be argued in insolvency proceedings that amended security is essentially new security. It would thus render amended security in its whole vulnerable to challenge because it would partially secure an old debt.
In conclusion, it is recommended, to the extent possible, to carry the increase of the scope of secured obligations under a new security document that states that the security created specifically secures the new obligations. Another advantage in using a new security interest is that it makes registration at the Registre du Commerce et du Crédit Mobilier more straightforward than it should be with an amended security document as well as preserves the rank of priority of the existing security interest securing the old debt as the existing security interest remains untouched.
- Advising Alphamin Resources Corp on the project financing for the development of the Bisie tin mine located in the province of North Kivu in the Eastern part of the Democratic Republic of the Congo (DRC), and operated by Alphamin Bisie Mining SA (ABM). Development of the Bisie tin mine will contribute to stability and economic growth of the North Kivu region. The transaction involves a senior secured non-revolving term credit facility of up to US$80m made available to ABM, as borrower, with Alphamin Resources Corp., Alphamin Holdings (BVI) Ltd. and Alphamin Resources (BVI), acting as guarantors. Security for the loan was provided on assets and shares in Mauritius, the British Virgin Islands (BVI) and the DRC. The transaction took into account restrictions in all of the concerned jurisdictions and in particular under DRC corporate and mining laws.
- Advising Tiger Resources Ltd on a US$162.5 million senior debt facility with the International Finance Corporation and Taurus Mining Finance Fund. The debt facility served to refinance Tiger’s existing debt with Taurus and Gerald Metals in respect of the Kipoi Copper Project, located in the Democratic Republic of Congo. In conjunction with the debt facility, Tiger successfully undertook an equity capital raising via a share placement and an accelerated non-renounceable entitlement offer to raise gross proceeds of up to US$25 million, with commitments received from IFC and by Tiger’s existing shareholder, Resource Capital Funds. Tiger Resources, like many other global mining corporations operating in DRC, relies on our expertise and in-depth knowledge of the legal and business environment in DRC as well as the OHADA law to close key transactions with great success.
- Advising Eurasian Resources Group and its subsidiary Metalkol S.A. on the construction and financing its RTR copper and cobalt project in the Kolwezi region of the DRC, using a Chinese EPC contractor and accessing financing from Chinese banks, with Sinosure cover, through the EPC contractor.
- Advising Compagnie des Bauxites de Guinée (CBG which is owned by Rio Tinto, Alcoa, Dadco and the State of Guinea) in connection with the expansion of its Sangaredi bauxite mine in western Guinea. The project involves the expansion of the capacity of the mine, and ultimately the construction of additional rail and port infrastructure to service increased production at the mine. We are advising on all aspects of the project, including the financing, the offtake agreements, the project documents and the infrastructure sharing arrangements between CBG, the State of Guinea and a third-party mining venture which is exploiting nearby reserves. The financing is being provide by IFC, OPIC and a syndicate of commercial banks (backed by a guarantee from UFK). With an anticipated quantum of $700m, it will be the largest private financing into Guinea to date. The requirements for infrastructure support and infrastructure sharing (both with the State and a third-party competitor) add additional complexity to the project.
- Acting for the DFI (Development Finance Institution) owned by the UK Government, CDC Group plc (CDC) in the financing of Canadian company Feronia Inc. (Feronia) (TSXV:FRN), a leading agricultural producer in the Democratic Republic of Congo. We advised CDC on the negotiation of a subscription agreement with Feronia pursuant to which CDC acquired 151,496,000 Feronia common shares for an aggregate purchase price of US$14.5 million, as well as a convertible loan agreement between the parties, pursuant to which CDC agreed to make available a maximum amount of US$3.6 million at an interest rate of 12% for a 5-year period. We also provided local regulatory advice. CDC’s equity investment is primarily intended to fund Feronia's existing and future oil palm replanting programmes, while the loan is aimed at supporting the implementation by CDC and Feronia of an environmental and social action plan.
- Advising Chemaf SPRL in respect of the proposed disposal by Shalina Resources Limited and Mr. Shiraz Virji of the entire issued share capital of Chemaf S.P.R.L. by way of an auction process. We advised on the proposed re-organisation of intra-group financing and financing arrangements.
- Advising Alufer Mining Limited (Alufer) on all the debt, equity, project development and offtake aspects of its Bel Air bauxite project in Guinea. We advised on the US$80m senior facility provided to Alufer by Orion Mine Finance, to be drawn in two equal tranches. Orion is also the offtaker of the bauxite under a complex, bespoke sales and marketing arrangement valued at approximately US$1.2 billion. We negotiated the both the financing and the offtake arrangements, as well as advising on the interface between the two. We also advised on the equity investments from Resource Capital Funds (RCF), Africa Finance Corporation (AFC) and Orion Mine Finance, which were provided through a mixture of equity (US$35m) and convertible debt (US$90m). This involved negotiating with the investors and also brokering an agreement between the various groups of creditors in relation to their respective rankings and security sharing positions. We took the lead role in coordinating all conditions precedent and closing administration for each of the investments and facilities. This included using our team’s significant local experience in Guinea to negotiate and finalise all onshore security arrangements. We were also heavily involved in assisting on the internal corporate aspects of implementing the transaction, including communications to obtain board and shareholder approval.
- Advising Taurus Mine Finance on the senior debt finance and secured royalty arrangements with Toro Gold Limited and its Mauritian and Senegalese subsidiaries. Toro Gold is developing its Mako gold project in Senegal.
 Articles 67 and 68 of the Uniform Act.
 Article 68 5°) of the Uniform Act.
 Articles 1-3 and 67 of the Uniform Act.