During the first half of 2021, there has been an increase in the number of companies filing for voluntary administration, principally due to the company’s not being able to meet its liabilities as they fall due. Other than that, there seems to have been a significant reduction in the number of new receiverships or insolvent liquidations during the preceding 18 months, partly due to the legislature’s intervention to restrict insolvency proceedings and partly due to the local banks providing continuous support to their customers.
On the other hand, as expected, there has been significant amount of debt restructuring.
The author is not aware of any forthcoming changes in legislation.
The Companies Act 2001 and the Insolvency Act 2009 are the principal laws governing the restructurings, reorganisations, liquidations and insolvencies of companies in Mauritius, generally. See 2.6 Specific Statutory Restructuring and Insolvency Regimes for an overview of statutory restructuring and insolvency regimes governing certain specific types of companies.
The following restructuring, reorganisation or insolvency procedures are available to companies in Mauritius:
There are no circumstances under which a company is obligated to commence formal insolvency proceedings within specified times. Nevertheless, in certain circumstances, directors of a company are behoved to commence formal restructuring or insolvency proceedings in order to avoid any risk of personal liability; see 10.1 Duties of Directors.
A person (other than the debtor company itself) may commence the following proceedings in the following circumstances.
An administration can only be commenced by the debtor company if the debtor company is unable, or is likely to be unable, to pay its debts as they become due in the ordinary course of business (ie, on a cash-flow basis). This is also the most commonly ground to commence winding-ups and receiverships.
However, the court may wind up a company on other grounds as well; see 7.1 Types of Voluntary/Involuntary Proceedings.
Financial Institutions Licensed by the Bank of Mauritius
The Banking Act 2004 overrides all other legislation when it comes to the restructuring or insolvency processes of financial institutions licensed by the Bank of Mauritius pursuant to the Banking Act 2004.
The Banking Act 2004 provides for the following three processes.
The general rules of the Insolvency Act 2009 continue to apply to insurance companies. However, these rules are supplemented and, in certain cases, overridden by the specific rules of the Insurance Act 2005 relating to winding-up, conservatorship and special administration.
Most notably, debt or other liabilities arising out of insurance contracts issued or underwritten by an insurance company rank in priority before any other claim against the assets of the insurer. See 5.5 Priority Claims in Restructuring and Insolvency Proceedings for the usual waterfall of payments during winding-ups.
Conservatorship of Insurance Companies
The Financial Services Commission may appoint a conservator if, amongst other things:
The conservator takes charges of the business of the insurer and its affairs and must exercise all powers necessary to preserve, protect and recover any of the assets of the insurer, collect all monies and debts due to the insurer, assert causes of action belonging to the insurer and file, sue and defend suits on behalf of the insurer.
The principal object of a conservatorship is to try to:
Special Administration of Insurance Companies
In 2015, the concept of “special administrator” was introduced in the Insurance Act 2005. The relevant authority has the power to appoint a special administrator if:
The special administrator takes control of the affairs and business of the insurer and has wide powers. For example, the special administrator has the power to transfer the whole or part of the undertaking of the insurer without the consent of any policyholder, shareholder, creditor or other stakeholder of the insurer and of any of its related companies.
There is a moratorium on winding-up proceedings against the insurer during the appointment of a special administrator.
The general perception among restructuring market participants and professionals is that consensual and/or non-judicial restructuring processes are preferable to statutory processes in as much as they tend to preserve value for stakeholders.
Based on our experience, absent indications of fraud or mismanagement, banks and other lenders are generally supportive of borrower companies experiencing financial difficulties pending a detailed assessment of their financial position.
Unfortunately, the applicable laws in Mauritius do not encourage or provide a formal framework for informal or consensual out-of-court restructuring and workout strategies. On the contrary, Mauritian laws encourage a director of a company which is insolvent to consider the appointment of an administrator or liquidator.
In Mauritius, the law do not require mandatory consensual restructuring negotiations before the commencement of a formal “statutory process”.
Typical discussions between a creditor and a borrower facing financial difficulties, as part of an initial informal and consensual process, would relate to a potential moratorium, debt restructuring, equity injection and/or the provision of external guarantees (eg, from shareholders or directors). If successful, the parties would normally implement their agreement through standstill agreements or amendment agreements to existing credit agreement.
It is common for creditors to request the debtor company to freeze all distributions to shareholders (whether through dividends or otherwise) and payments to related parties (other than those strictly necessary for the continued operation of the business of the debtor company). In some instances, where the creditor forms the view that the difficulties faced by the debtor company are, at least in part, due to the (mis)management of the debtor company, the creditor may require a change in the management of the debtor company. This happens only in extreme cases as, for obvious reasons, lenders are usually wary of interfering with, or participating in, the management of debtor companies.
Creditor committees set up during informal and consensual processes tend to be small and principally consist of sophisticated creditors such as banks or other financial institutions. These sophisticated creditors would normally participate in these discussions on a “without prejudice” basis and would normally maintain their rights or relative priorities until a solution is reached with the debtor company. The creditor having the largest exposure and/or topmost priority would normally have significant influence on the committee. It is unheard of for a creditor to agree to lower its priority during these discussions.
Creditors would normally request business plans, turn-around plans and/or restructuring plans during these processes.
There is no active market for distressed businesses in Mauritius. New money is typically injected by existing shareholder(s) or an acquirer of the business.
It is not common for super-priority liens or rights to be accorded to new money investors outside of a statutory or other formal process.
There are no special duties imposed on creditors during a restructuring or workout. Generally, creditors will need to act fairly and reasonably, in good faith and in a proper manner (“un comportement impeccable”). Wilful or negligent statements by a creditor during discussions or negotiations may potentially expose that creditor to tortious or contractual claims from other creditors.
However, the creditors’ relative freedom during discussions or negotiations is counter-balanced by the fact that a creditor who has been discriminated against during, or has suffered unfair prejudice as a result of a, compromise, scheme or deed of company arrangement may seek certain remedies from the court. For example, a minority creditor who voted against a compromise may seek protection from the court on the ground that the compromise is unfairly prejudicial to it. The court could potentially order that the compromise will not apply to that creditor.
Pursuant to a compromise with creditors under Part XVII of the Companies Act 2001, a majority in number and value of creditors can bind dissenting creditors to the terms of a compromise.
Credit agreements for syndicated loans typically allow a majority of the lenders (usually a two-thirds majority) to bind dissenting lenders in respect of waivers of defaults or other administrative aspects of the loans. Credit agreements, however, do not allow a variation of essential terms of the loans (eg, amount, tenor or covenants) without unanimity.
Informal consensual processes are not perceived as unworkable in Mauritius.
Overall, the Mauritian legislative framework is fairly supportive of consensual financial restructuring by, amongst other things, allowing majority creditors to bind dissenting creditors during a compromise with creditors, a scheme of arrangement or administration. The legislature has even provided for a court-driven “cram-down” process in certain situations relating to a deed of company arrangement.
Creditors can take the following liens/security in respect of each of the following types of property:
Outside of a restructuring or insolvency process of the debtor company, a secured creditor can enforce its lien/security in accordance with the terms and subject to the conditions of the agreement creating the lien/security and the mandatory requirements of the law (eg, the obligation to act in good faith).
By contrast, the rights of a secured creditor are curtailed during the administration or winding-up of a debtor company; see 6.1 Statutory Process for a Financial Restructuring/Reorganisation and 7.1 Types of Voluntary/Involuntary Proceedings.
In addition, a secured creditor may agree to curtail its rights by entering into an intercreditor agreement with other creditors of the debtor company. If the debtor company is party to such an intercreditor agreement, the debtor company may potentially enforce same against a creditor that is party to the intercreditor agreement.
Secured creditors do not have any special right that allows them to disrupt or block a formal voluntary or involuntary process (including in-court processes). In practice, secured creditors tend to be the largest creditors of a debtor company by exposure and, as such, tend to have significant clout during creditors’ meetings. In addition, the tendency has been that trade or other unsecured creditors would follow the proposals or positions taken by sophisticated investors such as banks or financial institutions in so far as the latter proposals or positions are not unduly burdensome or unfairly prejudicial to the trade or other unsecured creditors. This is possibly due to their inherent expertise and/or access to non-public information previously submitted by the debtor company to them, whether as a result of usual know-your-customer exercise or as a result of an application for banking facilities.
Secured creditors do not have any special procedural protection or right in statutory insolvency proceedings (such as administration or winding-up) or statutory restructuring proceedings (such as compromise with creditors or scheme of arrangements).
The starting principle is that all creditors are treated equally and have the same rights and priorities (the pari passu principle). However, certain creditors are able to obtain priority above other creditors by virtue of them holding security or being in a special position (eg, employees or government authorities).
New unsecured trade creditors are kept whole during voluntary administration or receivership. Administrators and receivers are personally liable for debts incurred in the exercise of their powers.
In addition, receivers are personally liable for wages and salary accruing during receivership (unless the receiver has lawfully terminated same within 14 days of their appointment) and rent accruing during receivership. The court may limit the liability of the receivership in respect of such debts, or even relieve the receivership from any liability at all.
Unsecured creditors of a debtor company do not have any special right in a restructuring or insolvency proceeding. They do not have any special right to disrupt a formal voluntary or involuntary process or to ask for a stay or deferral of a liquidation.
Prior to obtaining judgment, a creditor can initiate attachment proceedings (saisie-arrêt) against the debtor company before the court to seek a provisional attachment in the hands of a person holding monies owed to the debtor company. Upon obtaining judgment in their favour, the creditor can proceed to validate the attachment.
Alternatively, a creditor can seek a freezing order – Mareva Injunction – against the assets of a debtor company where the creditor has good reason to believe that the debtor may dissipate assets to frustrate any potential judgment debt.
Where the debtor company owns immovable properties, the creditor can obtain a judicial mortgage on those immovable properties to seek recovery of any unsatisfied judgment debt.
The receiver must distribute moneys received by them to the secured creditor who appointed them in priority to any other creditor. However, this is subject to such waterfall as may be prescribed by regulations from time to time. There are currently no regulations.
The distribution waterfall during winding-up can be summarised as follows:
The statutes do not prescribe any distribution waterfall during administration, presumably because one of the objectives of administration is to avoid winding up.
The following statutory processes are available for restructuring or reorganising the affairs of a debtor company:
Compromise with Creditors
This is an out-of-court process that can be initiated by the debtor company or, with the prior permission of the court, a shareholder or a creditor. A proposal for a compromise is sent to each creditor of the debtor company and the creditors are invited to vote on same. A compromise will be binding on the debtor company and all creditors if a majority in number and value of creditors vote to approve the same. Dissenting creditors will be “crammed-down”.
This process can be initiated if the debtor company is, or is likely to be, unable to pay its debts. The directors of the company continue to manage the company as usual during this process.
A compromise must not be unfairly prejudicial to a creditor (eg, by adversely reprioritising the claim of that creditor without good reason).
If a debtor company is subsequently put into winding-up, the court may order that the compromise will remain binding on the liquidator.
Creditors entitled to vote on a compromise include creditors relating to contingent or future debts.
The court may order that a compromise is not binding on a creditor if that creditors was given insufficient notice or there was some other material irregularity in obtaining approval of the compromise. A creditor who had voted against the compromise may ask for an order that it is not bound by the compromise if the compromise is unfairly prejudicial to that creditor. An application to the court must be made within 14 days of the creditor receiving notice of the result of the vote.
Scheme of Arrangement
A scheme of arrangement is a court process that can be initiated by the debtor company or, with the prior permission of the court, a shareholder or a creditor. The directors of the company continue to manage the company as usual during this process.
The court has the power to make a wide range of orders with regard to a scheme of arrangement. These include the transfer or vesting of property, the issue of shares, security or policies of any kind, the continuation of legal proceedings or the liquidation of any company.
It is common for the court to order the publication of public notices to allow any interested person to make representations to the court.
The court also has the power to direct the holding of meetings of shareholders or creditors and the court may also prescribe the threshold to be required for the approval of the proposed scheme of arrangement.
The stated objective of the process of administration is to provide the opportunity for the company (or its business) to continue in existence or, alternatively, to try to achieve a better return for the company’s creditors and shareholders than would result from the immediate winding-up of the company.
A company may appoint an administrator if the directors are of the opinion that the company is insolvent (from a cash flow perspective) or is likely to become insolvent. A creditor (or a receiver appointed by that creditor) having a security over the whole, or substantially the whole, of a company’s property may appoint an administrator if the security has become, and is still, enforceable.
The administrator takes exclusive control of the affairs of the company.
The rights of creditors to enforce their securities or to commence proceedings against a company in administration are restricted during the administration.
A first creditors’ meeting must be held within ten days of the appointment of the administrator. During that meeting, the creditors will have the opportunity to vote on whether to (i) replace the administrator or (ii) appoint a creditors’ committee.
A creditors’ committee is merely consultative and, other than the power to request reports from the administrator, the creditors’ committee does not have the power to give instructions or directions to the administrator.
The administration culminates in a watershed meeting where, after having considered the report of the administrator, creditors vote on whether to:
A resolution is adopted at the first creditors’ meeting or watershed meeting if a majority in number representing 75% in value of the creditors or class of creditors voting in person, or by proxy vote or by postal vote, vote in favour of the resolution.
A deed of company arrangement binds the company, its officers and shareholders and all creditors of the company. Creditors are bound only to the extent of claims arising on or before the day specified in the deed of company arrangement. There is a mandatory moratorium during the term of the deed of company arrangement and, unless the court orders otherwise, a creditor cannot take enforcement actions that is not permitted by the deed of company arrangement.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
Creditors do not have any specific role other than to vote on any matter requiring a vote.
Creditors’ committees may be set up during these processes, but they fulfil a mainly consultative function.
In each of the three restructuring/reorganisation processes (ie, compromise with creditors, scheme of arrangement and administration), dissenting creditors are bound by the majority decision if the requisite threshold is met.
Although minority creditors are bound by the requisite majority during votes held at a watershed meeting (see 6.1 Statutory Process for a Financial Restructuring/Reorganisation in relation to the importance of a watershed meeting during administration), the legislature has provided for an additional court-driven inter-class cram-down procedure in relation to deeds of company arrangement. Debatably, the legislature has sought to provide an administrator with a court process to validate certain deed of company arrangements in difficult cases. The court will only make an order to cram-down creditors in relation to a deed of company arrangement if:
Having regard to the duration of court proceedings to cram-down creditors into a deed of company arrangement, it remains to be seen whether such a process may effectively benefit a company under administration.
The insolvency statutes do not prevent claims against a company undergoing such a procedure to be traded. However, participants acquiring litigious rights must beware of the company’s right to settle the claim for an amount equal to the price paid by the participant.
The scheme of arrangement procedure may be used to reorganise a corporate group on a combined basis. Each entity of the corporate group involved in the scheme will have to be party to the court application, whether it is a single application or separate applications that will be joined together.
There are no restrictions on or conditions applied to the company’s use of its assets during a formal restructuring process and there are no authorisations or permissions required in that respect.
A sale of assets or of the business during administration is executed by the administrator. A sale of assets or of the business pursuant to the terms of a deed of company arrangement is executed by the deed administrator. A sale of assets or of the business pursuant to the terms of a compromise with creditors or a scheme of arrangement is executed by the directors of the company, or other persons to whom such powers have been delegated to.
There are no formal rules (and hence no restrictions) applying to creditor bids in Mauritius.
Pre-pack sales are permitted, and not uncommon, in Mauritius.
In principle, secured creditor liens and security arrangements, and other claims, can be released pursuant to such a procedure provided that such release is not unfairly prejudicial, discriminatory or otherwise unlawful.
Priority new money can be made available to the company pursuant to any statutory procedure and such new-money investments or loans can be secured by assets of the company, even those encumbered by pre-existing secured creditor liens/security. This is a matter of the stakeholders contractually agreeing to same.
Each statutory process has its own manner to ascertain and determine the claims of creditors of a debtor company. For example:
A company cannot reject or disclaim contracts as part of a compromise or scheme of arrangement.
An administrator of a company may issue a “non-use notice” in relation to properties leased by the debtor company, which will have the effect of relieving the administrator from any liability relating to the payment of lease instalments.
Even if a deed of company arrangement releases a debtor company from all or part of a debt that is secured by a third party, the liability of that third party is not discharged or otherwise affected.
Unless expressly restricted by a compromise, scheme of arrangement or deed of company arrangement, a creditor may exercise its right of set off, offset or netting.
A debtor company or another interested person may apply to court to seek a mandatory injunction/restraining order to force a creditor to comply with the terms of an agreed restructuring plan or agreement.
A defaulting creditor could potentially be liable for damages caused as a result of its failure to comply with the terms of an agreed restructuring plan or agreement.
There are no statutory provisions restricting existing equity owners to receive or retain any ownership or other property on account of their ownership interests.
The two types of insolvency proceedings are receivership and winding-up.
A debtor company may place itself into administration only if it is insolvent; the process of administration is explained more fully in 6.1 Statutory Process for a Financial Restructuring/Reorganisation. This is because, in principle at least, the stated primary objective of the process of administration is to provide the opportunity for the debtor company, or as much as possible its business, to reorganise and continue in existence. It would be more fitting for same to be dealt with together with the processes available as an alternative to bankruptcy.
A receiver may be appointed either (i) by a creditor pursuant to an instrument (usually a fixed and/or floating charge) granting that creditor the right to do so. or (ii) by the court.
The appointing instrument (whether it is the security document or the court order) sets out the powers of the receiver and/or manager.
A receiver is the agent of the debtor company. Although the receiver must have regard to the interests of the debtor company and other creditors, the receiver owes their primary duty to the appointing creditor.
The appointment of a receiver by a creditor does not prevent another creditor from appointing another receiver, if the latter has the right to do so of course. In the case of multiple appointments, the receiver who has been appointed by the creditor who has topmost priority will have precedence over the other receiver(s).
There is no statutory moratorium during receivership. The obligations of the debtor company under existing contracts subsist during receivership.
A receiver is personally liable for:
The debtor company and its directors are under an obligation to:
The receiver is obliged to file a first report within two months of their appointment to the Director of Insolvency Service and thereafter a report in respect of each six-month period.
See also 5.5 Priority Claims in Restructuring and Insolvency Proceedings.
Winding-up is the final stage of a company’s existence. This process may be commenced:
Potential grounds for a winding-up petition include:
The commencement of a winding-up is marked by the appointment of a provisional liquidator or a liquidator, as the case may be.
The principal task of the liquidator is to wind up the company’s affairs and realise and distribute the company’s assets.
The liquidator has broad powers, including the power to commence legal proceedings, the power to disclaim unprofitable or onerous property and to avoid certain prior transactions.
A creditor must submit a proof of debt to the liquidator and the liquidator will decide whether to admit or reject same.
Mutual credit and set-off is possible between the company in winding-up and its counterparty (other than a related person). However, there can only be mutual credit and set-off in respect of transactions occurring during the six months preceding the commencement of winding-up if the counterparty did not have reason to suspect that the company in winding-up was unable to pay its debts.
A third party, including a creditor, requires the permission of the court or the liquidator before commencing proceedings against the company in winding-up or enforce a right or remedy over or against property of the company.
Creditors cannot enforce any attachment, sequestration, distress or execution against the debtor company after the commencement of a court winding-up or an insolvent out-of-court winding-up.
See also 5.5 Priority Claims in Restructuring and Insolvency Proceedings.
The receiver has exclusive authority to negotiate and execute the sale of assets or the business during receivership. Provided that all secured creditors have released their respective securities, a purchaser would acquire good title in a sale of assets and that title “free and clear” of claims and liabilities asserted against the debtor company.
See also 6.8 Asset Disposition and Related Procedures.
A receiver can implement a pre-negotiated sales transaction if the receiver takes the view that such a transaction is in the best interests of their appointor, having given due regard to the interests of the debtor company and other creditors.
The liquidator has exclusive authority to negotiate and execute the sale of assets or the business during winding-up. Provided that all secured creditors have released their respective securities, a purchaser would acquire good title in a sale of assets and that title “free and clear” of claims and liabilities asserted against the debtor company.
See also 6.8 Asset Disposition and Related Procedures.
A liquidator can implement a pre-negotiated sales transaction if the receiver takes the view that such transaction is in the best interests of the general body of creditors.
There are no committees during receivership.
Creditors committee are facultative in out-of-court winding-up. At a meeting of creditors, creditors may vote to set up a committee of inspection. Creditors have the right to appoint not more than five persons (whether creditors or not) and directors of the company may also appoint not more than five persons.
The committee of inspection has the right to request the liquidator to furnish financial information. The committee does not have the power to give instructions or directors to the liquidator.
The members of the committee of inspection are not entitled to be reimbursed their respective costs.
A committee of inspection must mandatorily be set up during the winding-up of a public company. In regard to a private company, a committee of inspection can be set up at the request of a creditor or a contributory.
The committee of inspection has the right to request the liquidator to furnish financial information. The committee does not have the power to give instructions or directions to the liquidator.
The members of the committee of inspection are not entitled to be reimbursed their respective costs.
Part VI of the Insolvency Act 2009, dealing with cross-border insolvencies, came into force in July 2019. Part VI is based on the UN Model Law on Cross-Border Insolvency of 1997 without significant modifications.
The author is not aware of any cross-border insolvency litigation cases before the courts in Mauritius.
The rules on cross-border insolvency are based on the UN Model Law on Cross-Border Insolvency of 1997 without significant modifications.
Foreign or foreign-based creditors who have a claim in a Mauritian proceeding are treated equally with a Mauritian or Mauritius-based creditor.
Recognition and Enforcement of Foreign Judgments Generally
Save for certain exceptions (eg, judgments from courts of the United Kingdom which will be recognised by registration of same pursuant to bespoke legislation), a foreign judgment may be recognised and enforced in Mauritius pursuant to the process of exequatur before the Supreme Court of Mauritius. An exequatur of a foreign judgment will only be granted if the judgment satisfies the following conditions:
It is apposite to note that the exequatur judge will not look into the substance of the matter to determine enforceability.
Recognition of Foreign Insolvency Proceedings against a Debtor
Foreign proceedings (whether foreign main proceedings or foreign non-main proceedings) can be recognised by the Supreme Court of Mauritius in accordance with Chapter III of the UN Model Law on Cross-Border Insolvency of 1997, which is implemented in municipal law by the Insolvency Act 2009.
Foreign proceeding will be recognised if:
Recognition of foreign main proceeding will stay actions against the debtor, stay execution against assets of the debtor and suspend any contemplated disposal of assets of the debtor.
Administrators are appointed during administration.
Deed administrators are appointed in respect of a deed of company arrangement.
Receivers or receivers and managers are appointed during receiverships.
Liquidators or provisional liquidators are appointed during winding-up.
An administrator is the agent of the debtor company and must try to best protect the interests of creditors, employees and shareholders.
The receiver must exercise their powers in good faith and in a manner which they believe, on reasonable grounds, to be in the interest of the appointor. The receiver must also have reasonable regard to the interests of the debtor company, persons having interest in the property of the debtor company, unsecured creditors and sureties of the debtor company.
The principal duty of a liquidator is to take possession of, protect, realise, and distribute the assets, or the proceeds of the realisation of the assets, of the debtor company to its creditors in accordance with the applicable law.
Common to the Above Three Officeholders
In principle, administrators, receivers and liquidators are subject to the supervision of the court and may seek directions from the court. However, in practice, there is some reluctance on the part of the court to pronounce itself on proposed commercial decisions to be taken by the officeholder.
In addition, the activity of each officeholder is regulated by the Director of Insolvency Service and each officeholder is required to submit periodic reports to the Director of Insolvency.
In addition, the Official Receiver also supervises the conduct of a liquidator and has the power to inquire into the conduct of a liquidator and require answers from the liquidator in relation to matters arising out of a liquidation.
All these officeholders must be natural persons, be registered insolvency practitioners and must be free of certain prescribed conflicts (eg, having been an officer, employee or auditor during the preceding two years or having been a receiver of the company during the preceding three years). Oddly, a creditor is not expressly barred from acting as an officeholder, although such an appointment is likely to be questionable.
Registered insolvency practitioners are usually (but not necessarily) accountants and law practitioners.
An administrator may be selected and appointed by:
An administrator may be removed and replaced by the creditors or by the court.
A receiver may be selected and appointed by either a secured creditor or the court.
A receiver may be removed and replaced by their appointor or by the court.
During a court winding-up, the court selects and appoints the liquidator and the court may remove and replace a liquidator.
As part of a solvent out-of-court winding-up, the shareholders of the company may appoint, remove and replace a liquidator with a special resolution.
During a court winding-up, the court may appoint, remove and replace a liquidator.
A director who believes that the company is unable to pay its debts as they fall due must call a meeting of the board of directors to consider whether the board of directors should appoint a liquidator or administrator to the company.
Where a director fails to do so, at the time of that failure the company was unable to pay its debts as they fell due and the company is subsequently placed in liquidation, the court may on the application of the liquidator or of a creditor of the company, make an order that the director is liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to trade.
The board of directors has a further duty to consider whether to appoint a liquidator or an administrator of the company or to carry on the business of the company.
If a meeting was called but the board of directors did not resolve to appoint a liquidator or administrator of the company and at the time of the meeting there were no reasonable grounds for believing that the company was able to pay its debts as they fell due and the company is subsequently placed in liquidation, the court may, on the application of the liquidator or of a creditor of the company, make an order that the directors, other than those who attended the meeting and voted in favour of appointing a liquidator or an administrator, be liable for the whole or any part of any loss suffered by creditors of the company as a result of the company continuing to trade.
Common Law Duty to Consider the Interests of Creditors
In addition to the duties imposed by statute, it is arguable that the directors of a debtor company may also, in certain circumstances, have a duty to the company to consider or act in the interests of the creditors of the company. This duty, if any, is however owed to the body of creditors of the company and not to a particular creditor only.
In effect, upon this common law duty being triggered, the directors must conduct the affairs of the company in such a manner that no harm is caused to the interests of the creditors of the company as a general body.
Although this is said to be “duty to creditors”, a breach of this duty could not be directly enforced by the creditors, individually or collectively. An action against the directors for breach of this common law duty to the creditors could only be brought by the company or its liquidator.
This common law duty would be triggered when the company is either at the point of or in the vicinity of insolvency.
Except as stated in 10.1 Duties of Directors, creditors cannot bring direct claims against the directors of a debtor company. By contrast, an insolvency officeholder may bring proceedings against directors (or former directors) of the debtor company for directors’ breach of fiduciary duties owed to the company.
The following types of transaction can be set aside in the winding-up of a company.
See 11.1 Historical Transactions.
These claims can only be brought during the winding-up. It is the liquidator of the company who has authority to commence proceedings to set aside historical transactions.
The liquidator must follow the prescribed process by, inter alia, sending a notice to the company’s counterparty against whom the liquidator intends to recover property.
However, a court will not set aside a transaction where the company’s counterparty proves that:
Cram-Down in Voluntary Administration
Voluntary administration has been particularly topical in Mauritius over the past year, with Air Mauritius, the national carrier, having been in that process for about 17 months and exiting it following the approval by its creditors of a deed of company arrangement that compromisesseveral of its liabilities. Voluntary administration was introduced into the legal landscape of Mauritius by the Insolvency Act 2009 (IA 2009), as an alternative to liquidation and receivership of companies, with the specific objectives of rescuing companies or their businesses or (if rescue is not possible) ensuring better returns to creditors and shareholders than an immediate liquidation.
Creditors of the company, at a meeting called the “watershed” meeting, must decide on one of the following exit routes.
The IA 2009 requires that for a resolution to be passed at a meeting of creditors or classes of creditors, it must be approved by a majority in number representing at least 75% in value of those voting; the requirement for numerical majority ensures that small creditors have a meaningful say in approving a proposed DOCA. In 2019, Section 232 of the IA 2009 was amended to impose an obligation on administrators to call separate meetings for each class of creditors who shall vote separately, and to ensure that all classes of creditors are given equal treatment. While these requirements result in more fairness in the treatment of creditors as a whole in a DOCA, they also imply that each and every class of creditors has to approve a DOCA by a majority in number representing 75% in value. This gave rise to a real concern that a small class of disgruntled creditors could effectively veto a DOCA which was otherwise beneficial to the company as a whole.
The concern has now been addressed by a further legislative amendment in 2020, whereby a new Section 237A was introduced into the IA 2009 to give the power to the Bankruptcy Division of the Supreme Court (Bankruptcy Court) to cram-down classes of creditors who vote against a DOCA. The Bankruptcy Court would exercise its discretion to approve a DOCA and make it binding on all classes of creditors within certain parameters.
This is a welcome development as it, at least, provides an avenue to approve a DOCA where there are diverging results among classes of creditors. There are, however, still uncertainties in that during the time when a cram-down application is ongoing, the company is in a state where administration has otherwise ended and it does not have the protection of a statutory moratorium against claims and enforcement actions against it; it is also unclear whether the administrators are still in office to manage the company or whether it is the board of directors which takes back management powers. The requirement that the Bankruptcy Court will only intervene if the requisite majorities of all creditors who are intended to be bound have voted in favour of the DOCA also means that if several creditors have not voted at all, the Bankruptcy Court might find itself unable to approve the DOCA.
It will be up to the legislature to consider whether further amendments should be made to address those matters.
Priority of Tax Claims in Formal Insolvency Processes
A couple of Supreme Court judgments have cast doubt on the ability of secured creditors to recover their claims against companies in liquidation or receivership. In a liquidation, the Fourth Schedule to the IA 2009 sets out the order in which claims against the company are meant to be paid. In a receivership, Section 204 of the IA 2009 was amended in 2019 to provide that claims are to be paid in such order as may be prescribed; as at the date of writing, the regulations prescribing the ranking of claims in receivership are still awaited. In their absence, a commonly held view is that a receiver ought to distribute the proceeds of realisation in accordance with rules on priority of claims set out in the Civil Code.
Section 81A of the Income Tax Act 1995 (ITA 1995) sets out that an appointed person such as a liquidator, administrator or receiver must, before disposing of any asset of the company, set aside such sum out of the asset as appears to the Director-General of the Mauritius Revenue Authority (MRA) to be sufficient to provide for any income tax that is or may become due and payable by the company. A similar provision, now repealed, was found in Section 64 of the Value Added Tax Act 1998 in respect of value added tax.
In the decision of AAPCA (Mauritius) Limited (in receivership) and another v Mauritius Revenue Authority 2020 SCJ 297, the receiver had requested the MRA to erase the privilege it had inscribed in respect of taxes on the immovable property of the company – the MRA accepted subject to the receiver remitting all proceeds of realisation to it. Considering that such a condition was abusive, the receiver applied to the Bankruptcy Court for orders that sale be allowed to proceed, that the proceeds of sale be remitted to the receiver, that the receiver be allowed to distribute the proceeds in accordance with the law and that the MRA be ordered to erase its privileges upon the registration of the deed of sale. At first instance, the Bankruptcy Court decided that the application was premature in as much as the company was still disputing some taxes before the Assessment Review Committee and the outcome of that process had to be awaited. The company and the receiver appealed to the Court of Civil Appeal. Before the appellate Court, the MRA relied on Section 81A, and the Court ruled as follows:
The Court of Civil Appeal judgment did not consider the provisions of the Civil Code dealing with the ranking of claims and omitted to consider certain factors which could have been relevant, namely:
As such, the Court of Civil Appeal’s judgment regrettably failed to address how Section 81A of the ITA 1995 could have been read in a way which is harmonious with the existing regimes on ranking of claims in the IA 2009 and the Civil Code. The appellants in AAPCA have obtained conditional leave to appeal to the Judicial Committee of the Privy Council.
AAPCA being a Court of Civil Appeal judgment, when a similar issue came before the Bankruptcy Division, the judge considered herself to be bound by it: Best Flour & Co Ltd (in receivership), in the presence of the Director-General of the Mauritius Revenue Authority 2021 SCJ 301. In Best Flour, unlike AAPCA, the MRA did agree to the sale of the property and erasure of its privilege but on the condition that the proceeds of sale up to the amount of tax due be kept in an escrow account pending the outcome of a court application for directions.