Mauritius: Forms Of Security Under Mauritian Law

Last Updated: 15 November 1996
The hybrid nature of Mauritius' legal system becomes apparent when security is to be given as part of a transaction involving a Mauritian company. This may arise in the offshore context where a Mauritian offshore company has been established to hold shares in, for example, a power project in India, an important tax treaty partner for Mauritius. The capital intensive nature of power projects makes their financing a complex matter. Substantial institutional loans form a key element in the financing package. Institutional lenders require a raft of security measures to protect their interests. At the level of the power company in India there will be charges over the assets of the company. There will be a pledge of the shares in the Indian company by their shareholder usually the Mauritian company.

There will be a charge over the assets of the Mauritian shareholding company, and a pledge of the shares in the Mauritian company.

Further up the structure, the lenders may require a pledge of the shares in the entity which owns the shares in the Mauritian company.

At the level of the Indian company the charge of its assets and the pledge of its shares will be a matter for the law of India.

At the level of the Mauritian company, again the charge of its assets and the pledge of its shares will be a matter for the law of Mauritius. It is at this point that the international law firms which advise on these projects find that the security documents they require do not as easily conform to the international mould. While a pledge of shares in an Indian company may follow a common law model, and may even be governed by US or English law, a pledge of shares in a Mauritian company is based on French law, and must be governed by Mauritian law.

SHARE PLEDGE

The law governing a pledge of shares in a Mauritian company is set out in Section 85 of the Mauritian Companies Act 1984 and in Article 2077 of the Code Civil Mauricien. The essential difference between a common law share pledge or mortgage and the Mauritian share pledge, is that the self-help remedies available to a pledgee in common law, are not available to a pledgee of shares in a Mauritian company. A pledgee of shares in a Mauritian company cannot transfer the shares into its own name upon the occurrence of an event of default pledge.

The law provides that in the event of default, the pledgee has to serve formal notice on the pledgor allowing it eight days to remedy the default. If the pledgor has failed to remedy the default within the eight day period, the pledgee must publish the formal notice in two Mauritian newspapers before it can realise its security.

Mauritian law provides two remedies in the event of default.

The first is to apply to the court for the right to appropriate the pledged shares.

The second is to sell the pledged shares through a broker or a sworn auctioneer, following a formal notice as explained.

There are no other remedies.

The pledgee cannot take onto itself the right to vote or grant any consent or waiver of ratification, or make a private sale, except with court authority.

Article 2077 provides that a pledge of shares in a Mauritian company is created by an entry witnessing the pledge in the registers of the company.

The entry should contain the following information:

(1) reference to the contract giving rise to the pledge
(2) the names of the pledgor, the pledgee, and of the creditor
(3) the amount of the debt secured

Section 85 of the Companies Act goes further and specifies that the company should keep a register in which the transfer of shares given in the pledge should be inscribed, stating that the pledgee holds the share not as owner, but in pledge of a debt.

The entry should be signed by the pledgor, the pledgee and the secretary of the company.

Following the completion of these formalities, the share certificates should be handed over to the pledgee.

Articles 2129-1 to 2129-6 of the Code Civil Mauricien provides for a "special pledge in favour of banks".

That pledge is in fact an ordinary pledge, in the sense that the debtor is dispossessed of the shares and debentures which secure the debt, by their delivery to the creditor bank.

The particular features of the pledge in favour of banks - which justify the term "special pledge" - are the easy process of execution and the priority given to the bank over other creditors.

Article 2129-1 defines the limits within which this pledge is given:

  • the debt secured must result "from a loan or advance granted by a bank established in accordance with the provisions of the Banking Act".
  • the object of the pledgee must consist exclusively of "shares and debentures".

The conditions of form indicate the nature of the special pledge. By article 2129-3, the pledge is created by the delivery of:

(1) the shares or debentures intended to secure the amount due by the debtor or his surety, together with the resulting interest, commissions or charges;

a blank order of transfer, signed and undated, authorising the sale of the shares and debentures given in security.

This blank order of transfer allows the bank to proceed to execution immediately and efficiently, which is the distinguishing mark of this special pledge. When the debt is demandable, and seven days after notifying the debtor or the surety, by a registered letter or by a summons served by an usher, that it intends to sell the shares or debentures given in pledge, the bank may, by reason of article 2129-5, "proceed of its own accord to convert its special pledge into money". The process of execution is therefore effected without any other formality, and without recourse to a broker or sworn auctioneer.

Once the pledge is sold, the bank has the right to reimburse itself directly from the sale price, "by priority over any other creditors". This absolute priority in favour of the bank is the second distinctive mark of this pledge, and where it differs from the general law of pledge.

The benefit of the special pledge accrues only to a bank which has lent or advanced the loan itself. It is not available where the bank is an agent for another lender.

It is possible for the benefit of the pledge to be obtained by the lender making back arrangements with a bank established in conformity with the Banking Act.

MORTGAGE

By contract to the pledge, which involves the creditor pledge taking possession, whether physical or constructive, of the debtor's asset until payment of the debt, the mortgage involves a transfer of ownership to the creditor upon the express or implied condition that the asset shall be transferred back to the debtor when the sum secured has been paid. Under Mauritian law, a mortgage or "hypotheque" can only be of immovable property. There is no Mauritian equivalent of the English share mortgage.

CHARGE

Mauritian law does recognise the concept of the charge, which does not involve the transfer either of possession or of ownership, but constitutes the right of the creditor to have a designated asset of the debtor appropriated to the discharge of the indebtedness.

Mauritian law, in following the English law of charge, also recognises the English division of the charge into fixed or floating charges. The fixed charge is one which attaches as soon as the charge has been created, so that the debtor cannot dispose of the asset free from the charge without the chargee's consent except by satisfying the indebtedness secured by the charge.

By contrast, the floating charge is one which hovers over a designated class of assets in which the debtor has or will in the future acquire an interest, so that the debtor can deal with any of the assets free from the charge so long as it remains floating. Under English law the charge crystallises upon the occurrence of an event of default, and it attaches as a fixed security to all the assets then comprised in the debtor's ownership. Under Mauritian law there is no automatic crystallisation of a floating charge. The occurrence of an event specified in the charge gives the chargee the right to start the procedure to obtain crystallisation. The procedure for obtaining crystallisation is as follows:

1. The chargee must serve on the Conservator of Mortgages a Notice of Crystallisation (the "Notice"). The Notice must contain the basis, legal or contractual, of the demand for crystallisation. A certified copy of the charge deed must be annexed to the Notice.

2. The Conservator of Mortgages, upon receipt of the Notice, will inscribe the Notice in the register for inscription of fixed and floating charges.

3. From the date of inscription of the Notice in the register, the Notice has effect against any third party dealing with any of the charged assets. The immediate effect of the inscription of the Notice in the register is that it allows the chargee, without notice to the chargor, and without judicial process, to take measures through an usher of the Supreme Court to conserve the charged assets. Such measures include seizure or fixing of seals.

4. The conservatory measures will have to be lifted if within 30 days of the inscription of the Notice an inventory list of the charged assets is not drawn up by the chargee as per paragraph 7 below.

5. The chargee must also send the Notice by registered post to the chargor. Upon receipt of the Notice, the chargor cannot dispose of the charged assets without the written authorisation of the chargee.

6. The chargor may, within 10 days of receipt of the Notice, contest the basis given for crystallisation before a judge in chambers.

7. The chargee must, within 30 days of the inscription of the Notice with the Conservator of Mortgages, have an inventory of the charged assets made by an usher of the Supreme Court. The inventory must be drawn up in two originals and be signed by two witnesses. The two originals must be sent to the Conservator of Mortgages who will enter the details of the inventory in the register for the inscription of fixed and floating charges.

8. From the date of the inscription of the details of the inventory in the register, the chargee can dispose of the charged assets until full payment of the debt.

The content of this article is intended to provide general information on the subject matter. It is not, therefore, a substitute for specialist advice.

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