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Alternatives for restructuring of intercompany debts

The continued devaluation of the Real has increased the total indebtedness of Brazilian subsidiaries of foreign groups that incurred debts in foreign currency, particularly in relation to the U.S. dollar and the Euro, and these subsidiaries are now seeking ways of restructuring the debts to their parent companies. Such devaluation may cause very serious impacts, affecting financial results and possibly making the debts unpayable.

It is a fact that there has been a significant positive variation of the U.S. dollar in relation to the Real in the last few years. By way of example, the average annual dollar/real rate in 2015 was approximately R$ 3,34 and the average partial annual rate for 2020 calculated up to July 31, 2020 was R$ 4,98 , the rate today being more than R$ 5,60. In view of this scenario, the need has arisen to discover what action permissible under Brazilian law may be taken to restructure intercompany foreign currency debts, in order to reduce risks and negative impacts related to the exchange variation for the Brazilian subsidiaries.

For an analysis of such action, we have separated the debts, by their nature, into three groups: loans, importations and other types of debt.

As far as the first group is concerned, namely foreign currency loans, the principal amount and interest may be converted into a direct investment, whereby the total amount due will be converted into quotas or shares in the Brazilian debtor company, by establishment or increase of the creditor’s equity interest in the said company. However, in relation to this group it must be borne in mind that loans converted into direct investment in a period of less than 180 days from the date of entry of the funds will be subject to IOF (tax on financial operations) at the rate of 6%, plus penalty and interest from the date of entry of the funds into the country, whereas loans made and converted over longer periods will benefit from a zero rate for the same operation, pursuant to article 15-B, items XI and XII of Decree 6.306/07.

It is important to note that for any symbolic foreign exchange operation, whether of the type now referred to or any other described in the legislation such as those below, the rate of IOF on the exchange is also reduced to zero rather than the usual 0.38%, in accordance with article 15-B, item XVIII of Decree 6.306/07.

It must also be pointed out that the total amount of interest, if converted into capital, will be subject to the withholding income tax at the rate of 15%, since the conversion is regarded as being a form of payment of the obligation.

Also in relation to loans, if the conversion into capital is not a feasible alternative, but it is intended even so to avoid the risk of the foreign exchange variation, there is the possibility of switching to Reais the foreign currency applicable to the loan.

Another operation that merits attention for the purpose of restructuring debts in foreign currency involves importations, which may be converted into a loan, preferably with a change of currency into Reais, since the intention is to eliminate the risk of foreign exchange variation, or into direct investment.

For conversion of debts incurred on importation into a loan in local currency, it is necessary for the creditor formally to express its intention of doing so by means of a declaration, stating that the amount of the loan will be in Reais, to be calculated at the moment of the simultaneous exchange operations. Special attention should be paid to the incidence of IOF, the ideal solution being that the loan in question stipulate a repayment term of at least 181 days from the conversion, in which case a zero rate will be applied.

Conversion of the importation into direct investment may take place at any time by means of a declaration by the creditor and acceptance by the debtor, resulting in simultaneous symbolic foreign exchange operations.

As regards other foreign debts of an unspecified nature, these may be converted into a loan or direct investment, in the same way as importations, since any obligation that involves payment abroad may be converted, the only requirement being a formal statement by the creditor to that effect. However, it should be noted that some operations involving certain debts may give rise to the incidence of taxes as a result of their nature and must be considered specifically for the purpose of conversion. In this connection it must always be borne in mind that the exchange on sale of foreign currency on the conversion, the first leg of the symbolic operation, gives rise to the same effect as in the case of actual repayment.

It should be mentioned that the figures resulting from the conversions will be calculated in accordance with the exchange rates on the date of the symbolic operations for the conversion rather than the historic value of the debts in any of the cases above.

In relation to debts that are not capable of registration under the foreign exchange legislation, and cannot therefore be the subject-matter of a symbolic exchange operation for conversion, in accordance with Law no. 11.371/06, there is still the possibility of conversion into direct investment with the registration of so-called “contaminated” capital, which, although feasible, must be considered with great care.

Finally, before carrying out any restructuring of foreign currency debts, it is necessary to confirm that the information lodged with the Central Bank of Brazil is up to date, and also to consider from the group structural viewpoint the best option to be adopted.

Deborah Henriques Grasmann de Carvalho and Adolpho Smith de Vasconcellos Crippa

Associate lawyer and Partner in Company Law Area – São Paulo

[email protected] and [email protected]

Disclosure of Beneficial Ownership under the Companies Act

By Craig Douglas Oyugi, Partner at Africa Law Partners. A short summary of the salient issues arising out of the Companies (Beneficial Ownership Information) Regulations 2020.

Introduction

The Companies Act, 2015 (the Principal Act) was amended by the Companies (Amendment) Act, 2017 (Amendment Act) to include, amongst other things, the concept of “beneficial ownership” by including section 93A of the Principal Act. The Amendment Act establishes a register in order to record the information of beneficial ownership and control of Kenyan companies. The Companies (Beneficial Ownership Information) Regulations (the Regulations) were promulgated under Legal Notice 12 of 2020. The concept of beneficial ownership was established as part of Kenya’s efforts to battle corruption and increase transparency in the ownership and control of legal entities.

The Companies Registry of Kenya recently issued a notice stating the operationalisation of the beneficial ownership registry from 13 October 2020.

The effect of registering a “beneficial owner” has numerous implications across different spheres of practice. The following commentary aims to outline these effects in practice.

Who is a Beneficial Owner?

A beneficial owner under the Regulations must be a natural person and not a legal person. In order to be classified as a Beneficial Owner, a natural person must:

  • holds at least ten per cent (10%) of the issued shares in the company either directly or indirectly;
  • exercise at least ten per cent (10%) of the voting rights in the company;
  • hold a right to directly or indirectly appoint or remove a director of the company; or
  • exercise significant influence or control over the company.

This definition includes persons who may hold significant influence or control as a result of a variety of commercial arrangements or instruments such as provisions in the company’s constitutional documents, the rights attached to the shares or securities which a person holds, shareholder agreements or other agreements resulting in giving such person(s) material influence over the company and its affairs.

Obligations of a Company

The Regulations place the following obligations on companies:

      1. A company shall take reasonable steps to identify its beneficial owners and enter their details into a register of beneficial owners which is different from the register of members;

      2. The following information will be included in the register of beneficial owners;

         a. the full name;

         b. full name;

         c. birth certificate number (where applicable);

         d. national identity card number or passport;

         e. Kenya Revenue Authority personal identification number (where applicable);

         f. nationality;

         g. date of birth;

         h. postal, business and residential address;

         i. telephone number;

         j. email address;

         k. occupation;

         l. nature of ownership or control; and

         m. date on which a person became a beneficial owner.

      3. The Regulations require a company to file with the Registrar of Companies (the Registrar), within 30 days of preparation, a copy of the company’s register of beneficial owners. Furthermore, if there is any change in the composition of the company’s beneficial ownership, these changes shall be made on the register of beneficial ownership and filed with the Registrar as soon as the change occurs.

      4. Where a company believes that a person is a beneficial owner it is the company’s duty to investigate and notify the potential beneficial owner. Once notified, the beneficial owner must furnish their particulars within (21) days, failure to which the company must issue a “warning.”

      5. Once a warning has been registered against a beneficial owner’s interest and the beneficial owner persists in omitting their particulars a restriction is placed on the beneficial owner’s interest in the company and is registered in the company’s beneficial ownership register as well as with the Registrar.

Restrictions

The net effect of a restriction on a beneficial owner’s interest in a company is the inability to transact or benefit from the proceeds of their interest in the company. In practice, the restriction against a beneficial owners interests would mean that;

      (i) the beneficial owner would not be able to exercise any rights in respect of their interest;

      (ii) the beneficial owner would not be able to transfer their interest in the company; and

      (iii) no payments from the company can be made to the Beneficial Owner as a result of their interest.

Disclosure of Beneficial Ownership and Data Protection

Although companies have a duty to gather information regarding beneficial ownership, its disclosure is limited to the beneficial owner, the company and the Registrar. It must be noted that the information is not public information, and as such cannot be disclosed for the general public’s consumption. The company is prohibited from disclosing information gathered from a beneficial owner save for if the disclosure is;

      (i) required by the Regulations;

      (ii) for effecting communication with the beneficial owner;

      (iii) in compliance with a court order; or with

      (iv) the written consent of the beneficial owner.

Disclosure of information provided by a beneficial owner in any manner other than in compliance with the Regulations is punishable by a fine not exceeding Kenya Shillings twenty thousand (KES 20,000) or imprisonment for six (6) months or both.

Disclosure of Beneficial Ownership and Nominee or Trustee Shareholding

Companies, for a variety of reasons, have had interests of shareholders held through nominees and trust arrangements. In order to comply with the Regulations, companies will need to disclose who the beneficial owner under a nominee arrangement is and who the ultimate beneficiary is under a trust arrangement. In these instances, the beneficial owner would be the person that derives the true economic benefit from the legal interest in the company.

Conclusion

Transparency in the beneficial ownership of companies in Kenya is a reality. This will inevitably have an effect on ownership through nominees and trust arrangements. This poses additional considerations when structuring transactions where the non-disclosure of a beneficial owner is key. This would need careful consideration, on a case by case basis of the optimal structure to adopt.

Should you require any more information or assistance kindly contact Craig Douglas Oyugi or Samuel Mwendwa Kisuu.

This alert is for general use only and should not be relied upon without seeking specific legal advice on any matter.

Extension of Time in Construction Contracts

An Extension of Time (EOT) is a clause in most of construction contracts offering the contractor the possibility to extend the construction period when a delay occurs. That delay must not be the contractor’s fault but caused by a distinct relevant event. There is a wide variety of events that could potentially disrupt a construction process and entitle the contractor to an EOT. Some relevant events are frequent, like failure to provide information, variations, or delay in giving the contractor possession of the site. Other relevant events are rare and rather unpredictable in the long term, like civil unrest, exceptionally adverse weather, or war.

When a delay happens or is about to happen, the contractor has to give written notice to the consultant/client. Such notice must clearly identify the relevant event responsible for the delay, as well as prove the causality between the disrupting force and the delay itself. If the other party shares the same view on what caused the delay, they usually grant the EOT and adjust the completion date accordingly. The completion date is a vital temporal landmark in the life of a construction project. Such a date establishes a clear limit for the main scope of works included in the contract to be completed.

EOT requests have to be thoroughly prepared before submission to maximise clarity and facilitate agreement. After identifying the responsible relevant event, the contractor has to link it to the contract clause that allows for the request. However, that is not always enough. The construction project can deviate from the baseline programme produced at the start of the contract, without that programme being updated to account for drops in productivity. In that case, the contractor might have difficulties separating delays occurring from its own fault from delays related to the relevant event. Besides causality, the claim for extension should also address liability. In other words, the contractor provides proof that they fully understand their responsibilities. Often, EOT requests have to be submitted in a certain time window to retain their validity.

Successful claims are reliant on good practices regarding documenting the delays. The contractor should be able to record when and why the relevant event occurred and output a list of resources, tasks, and activities that it directly or indirectly affected. It helps to have proof of all actions or alternative solutions taken to minimise the delay, as well as quantify all associated costs. Once all the available information is gathered, the contractor deploys a Delay Analysis meant to estimate the impact on the project completion date. Construction contracts are generally geared on allowing the construction period to be extended when the contractor has no fault in the delay and has formulated an EOT application. However, not all claims are successful. An application can be rejected when it is proven that the contractor has actually underperformed. Judging claims for extensions of time is more complicated when concurrent delays occur. For example, a contractor already not keeping up with the programme due to a force outside their control (excusable delay) might also have been the cause for a different delay (inexcusable) where both of these delays’ effects are felt simultaneously. Usually, in this case, the contractor would claim for an EOT award and avoid paying liquidated damages while the owner is relieved from compensating the contractor for its prolongation costs.

Concurrent Delay

A concurrent delay occurs when independent delays overlap, each affecting the schedule and completion date of a construction project. Depending on project scale and complexity, two or more concurrent delays can act at the same time. True concurrency means the delay events of the client and the contractor both start and finish at the same time. However, true concurrency is very unlikely to occur. Reality shows that delays need only to overlap for a given period of time to qualify as concurring delays.

The most relevant aspect of concurrent delays is that courts, boards of contract appeals, arbitration panels, and experts, are inconsistent in defining and assessing concurrent delays. That is a direct consequence of contracts failing to include terms for matters of concurrency or doing it in an ambiguous way. Concurrent delays represent unique situations in which establishing liability is not a straightforward process. Although the consequences overlap, the causes are usually traced at various dates back in time. This leads to the difficult task of establishing the presence or absence of correlation. The most common bias here is to assume that if one event came after another, it must have been influenced by it.

While normal delays generate well-known contractual consequences, supported by either the client or the contactor, concurring delays leave many ends that are open to interpretation. Owners use concurrent delays to avoid being billed for extended overhead, change orders and other claims. On the other side, contractors invoke concurrent delays to escape paying liquidated damages and to recover extra costs associated with delays. A common example occurs when the contractor is already behind schedule by its own fault and the client triggers a second delay-producing event. Concurrent delays also take place when a delay caused by one party overlaps with an abnormal neutral event (extreme weather, social or political disturbance) causing an excusable event.

Judging concurring delays is complicated and verdicts are often unpredictable. An investigation is launched to establish culpability, with the first focus on confirming that the delays are indeed independent of each other. That is usually done through an analysis that proves the impact on the critical path of one delay persists when all the other concurrent delays are neglected. Another condition for concurrency as defined in AACE International RP 29R-03 is that none of the delays are voluntary. In addition, the delayed work has to be substantial and not easily correctable to constitute a claim. One possible outcome when no dominant cause of delay is found is apportioning delay. The decision must be fair for all parts, as verdicts on concurrent delays are often judged based on legal precedent. How cases are solved today will influence future cases.

When supporting their claims, parties should provide evidence derived from records of documents and communication. Such evidence must focus on pinpointing the exact moment the event causing the delay occurred. A cause-effect relation has to be proven, most often through a critical path analysis. Parties have an advantage when they can provide proof of identifying and addressing the danger of the delay with written notices.

Contractors should invest time and resources into making sure the contract’s requirements are well-known by all their personnel having an administrative role in the project. This is crucial for notifying delays in a timely manner and in applying for time extension. Prompt notice on anything that can potentially impact project completion should become a priority as any delays can have weight in court, even if the other party is also responsible for much of the delay. A contractor invoking a concurrent delay should always back their claims against a solid construction schedule. Owners should also take a proactive stance by being careful that the contract terms are enforced from the very beginning. The danger here lies in a more relaxed and passive attitude being mistaken by the contractor as implied consent.

Invoking a concurrent delay can constitute a strong defence for both contractors and owners. However, for that to be achieved, parties need to familiarise themselves with accurate tools for schedule updates, analysis, and forecasts. Concurrency of delay will probably continue to remain one of the most complex matters regarding construction claims, a double-edged sword that introduces uncertainty and maximises the potential for conflict.

Acceleration Claims

An acceleration of a construction project defines the situation when work is performed at a faster pace than initially planned. In most cases, acceleration is needed to counteract accumulated delays and to meet the agreed completion date. Acceleration can also occur when the contractor has a direct interest in seeing a project completed ahead of schedule – either by receiving a performance bonus or by relocating resources to another project. The contractor can accelerate work on a project by requesting its workers to perform overtime, by adding a new shift, hiring additional labour, subcontracting, or changing the sequence of activities. Whatever method is chosen, it comes with extra costs that can or cannot be later recovered. Accelerating the project schedule is never free. In addition, when the acceleration is sudden, labour productivity decreases substantially because of fatigue (for current workers required to do overtime) or unfamiliarity to the project (new workers).

There are three types of acceleration that are different based on their causes: Voluntary Acceleration, Directed Acceleration, and Constructive Acceleration.

Voluntary Acceleration describes the situation when the contractor unilaterally takes the initiative of speeding up work on-site, without being previously asked by the owner to do so. This can result in costs that go beyond the original bid and which won’t be recovered unless the client is notified and agrees with the acceleration. Reasons for a client to accept a voluntary acceleration mostly relate to the ability to generate revenue faster by selling, letting, or starting production, which can counterweight the increase in construction costs.

Directed Acceleration is the simplest and most straightforward case of speeding up the construction schedule. The client requests the contractor to accelerate work and pays for the acceleration costs. Such a situation won’t lead to disputes if parties agree on the magnitude of additional costs.

Constructive Acceleration is a situation that is not explicitly voluntary nor directed. Constructive Accelerations typically occur when the contractor is able to invoke an excusable delay such as design changes, added scope, extreme weather, site conditions that differ from bidding specifications, or force majeure events. Owner-caused delays also qualify to justify a constructive acceleration, as well as any other factors beyond the contractor’s control that couldn’t be initially assessed as risks.

Each type of acceleration can lead to an acceleration claim. Voluntary Acceleration claims don’t entitle to extra payment unless agreed with the client. Directed Acceleration claims usually have a predictable outcome, as extra payment is granted to the contractor once an agreement is reached. Constructive Acceleration claims are the ones more prone to create a dispute. The client might argue the contractor wasn’t entitled to accelerate, and the contractor might argue that accelerating the project was the only choice. Acceleration claims must meet a set of preconditions to constitute a reasonable dispute and grant compensation to the contractor. First, the excusable delay must be clearly identified. Delays qualify as excusable only if they impact the critical path of the schedule. Second, the contractor must have made the request for time extension according to contract obligations and in a timely manner to accommodate a response. If the owner denied the request, thus implicitly requiring for project completion according to the initial schedule, it forces the contractor towards a constructive acceleration. The final condition states the contractor must attempt an acceleration to counteract the delays caused by the excusable event and prove such action incurred extra costs.

As always, solving acceleration claims in a mutually advantageous way requires for communication between parties to be prompt and explicit. The difficulty of proving delays and associated acceleration orders highlights once more the importance of proper document management.

To give an example, the contractor is mistaken if they speculate a time extension won’t be granted by the client and act according to that presumption. What might have constituted a valid constructive acceleration becomes a voluntary acceleration in the absence of written client consent. Another common issue regarding acceleration claims is when the granted time extension is insufficient. In that case, a contractor has to prove that the anticipated work requires additional time or additional cost compensation.

Lastly, acceleration is a topic that has to be addressed as early as possible in a complex project. It is always simpler and less disruptive to smoothly speed up works as they encounter the first signs of delays, instead of waiting for them to accumulate.

The New Company Law and the Constitutional Rights of Nigerians

The Companies and Allied Matters Act, 2019 (“the new CAMA”) recently signed into law by the President of the Federal Republic of Nigeria is a welcome development to Nigerian businesses. It has addressed the bottlenecks in formation of business entities and improved Nigerian corporate governance. It has also given leverage to small companies to thrive and incorporated technological innovations to the processes of the Corporate Affairs Commission (“Companies’ Registry”) to facilitate the ease of doing business in Nigeria.

However, the legislature in extending the powers of the Companies’ Registry to effectively regulate the activities of Churches, Islamic Religious Organisations, Charity and Non-Government Organisation which are registered as Incorporated Trustees (“associations”) has introduced some new provisions in the new CAMA which are capable of usurping the fundamental rights of citizens to their freedom of thoughts, conscience and religion, freedom of peaceful assembly and association and constitutional rights of access to Courts.

It is upon this premise that the Plaintiff, a Nigerian Citizen and Legal Practitioner, commenced Suit No. FHC/ABJ/CS/1076/ 2020; Emmanuel Ekpenyong Esq. v. National Assembly, Corporate Affairs Commission and Attorney General and Minister of Justice of the Federation at the Federal High Court, Abuja Division, challenging the constitutionality of some provisions of the new CAMA.

The Plaintiff contends that Section 839 of the new CAMA which gives power to the Companies’ Registry to remove trustees and appoint an interim manager to take over an association where it reasonably believes that there is misconduct, mismanagement, fraudulent practices, for protection of the property of the association and public interest; Section 842, Section 843, Section 844 of the new CAMA which gives the Companies’ Registry the powers to control the proceeds of a dormant account of an association and dissolve an association on account of its dormant account; Section 845, Section 846, Section 847 and Section 848 of the new CAMA which directs associations to keep and submit their statement of affairs and accounting records to the Companies’ Registry, infringes the Plaintiff’s freedom of thoughts, conscience and religion enshrined in Section 38 of the Constitution of the Federal Republic of Nigeria, 1999 (as amended) (“the Constitution”).

The Plaintiff opines that Churches, Islamic religious organisations, Charity and Non-Governmental Organisations give hope to the Plaintiff and the Nigerian people. The activities of associations augment the efforts of government. They act as watchdogs for the people and put the government in check. It is unfortunate for the provisions of the new CAMA to put the activities of associations under the complete whims and caprices of the Companies’ Registry which is an agency of the Federal Government.

The law provides for every association to have a Constitution which regulates the affairs of the association and protect them against misconduct, mismanagement, fraudulent or other activities which are contrary to the objects of the association. Hence, the Companies’ Registry has no business whatsoever in suspending trustees and appointing interim managers for them. This is a sure recipe for disaster. The activities of associations are not against public interest to warrant such draconian provisions.

The funds of associations are not public funds. They are contributions, offerings and freewill donations of members to carrying out their objectives. There is no legal justification for the Companies’ Registry to be interested in the dormant account of associations. Associations are non-profit making organisations. They are not business ventures as such the Companies’ Registry cannot be ingrained in the affairs of associations by expecting them to submit statement of affairs or accounting records to the Registry.

The Plaintiff has a freedom to his thought, conscience and religion alone or in community with others. The Plaintiff has a right to propagate his religion, worship, teaching, practice and observance in public or private and does not even need to register same with the Companies’ Registry to propagate same. Therefore, giving powers to the Companies’ Registry who is an outsider and complete stranger to determine the affairs of a place where the Plaintiff professes his thoughts, conscience and religion is an aberration which is in contravention of Section 38 of the Constitution.

Furthermore, the Plaintiff contends that Section 839, Section 843, Section 844, Section 845, Section 846, Section 847 and Section 848 of the new CAMA infringe his freedom to peaceful assembly and association. This is because the Companies’ Registry has a wide discretion to appoint interim managers to replace suspended trustees. The interim managers to be appointed by the Companies’ Registry may have nothing in common with the members of the association and the members will not have a right to challenge such appointment.

This will impair the rights of members of associations to actively participate in activities of their associations and determine its direction. The enormous and dictatorial powers given to the Companies’ Registry to intrude and interfere with the operations and management of associations is not legally justifiable. The use of phrases such as “is satisfied”, “reasonably believes”, “deem it necessary”, “public interests” in relation to the powers of the Companies’ Registry over associations are ambiguous phrases that can easily lead to an abuse of power by the Companies’ Registry and contravene the Plaintiff’s freedom to associate peacefully with other persons enshrined in Section 40 of the Constitution.

Again, the Plaintiff contends that the provisions of Section 851 of the new CAMA which gives powers to the Administrative Proceedings Committee to hear cases arising from the provisions of the new CAMA limits the Plaintiff’s constitutional rights of access to Courts. Section 6 (1) and 6 (b) of the Constitution confers judicial powers to the Courts. Section 36 (1) of the Constitution gives citizens the right to access an independent and impartial Court to determine their civil rights and obligations. Section 251 (1) (e) of the Constitution provides for the Federal High Court to hear any matter arising from the provisions of the new CAMA.

Hence, the provision of Section 851 of the new CAMA comes as a very huge surprise. The composition of the Administrative Proceedings Committee is made up mostly of employees of the Companies’ Registry who are involved or aware of the issue which caused the dispute in the first place. It is against the principle of natural justice for a person to be a judge in his own case. In most disputes arising from the provisions of the company law or regulations, the Companies’ Registry is usually a party to the dispute.

The Companies’ Registry cannot independently and impartially determine a dispute which it is also a party. If this is allowed the Companies’ Registry will be a party and judge in its own case. It is without doubt that Section 851 of the new CAMA is contrary to the Plaintiff’s rights of access to Courts enshrined in Section 6 (1) 6 (b), Section 36 and Section 251 (1) (e) of the Constitution.

In conclusion, the Plaintiff contends that his freedom of conscience, thoughts and religion, freedom of peaceful assembly and right to access to Court are so serious and the only way to ensure that the rights are protected in the circumstance, is for the provisions of Section 839, Section 843, Section 844, Section 845, Section 846, Section 847 and Section 848 and Section 851 of the new CAMA to be expunge from the new CAMA. The Plaintiff prays for an order of mandatory injunction of the Court directing the Defendants to expunge the offending provisions of the new CAMA.