Mauritius - Report on the observance of standards and codes (ROSC) : insolvency and creditor rights systems

35112 REPORT ON OBSERVANCE OF STANDARDS & CODES MAURITIUS INSOLVENCY AND CREDITOR RIGHTS SYSTEMS Prepared by a staff team1 of the World Bank from information provided by the Mauritian authorities. March 2004 CONTENTS EXECUTIVE SUMMARY I. INTRODUCTION.....................................................................................................................................................1 II. DESCRIPTION OF COUNTRY PRACTICE..........................................................................................................1 A. Creditor Rights and Enforcement Procedures .................................................................................................2 B. Legal Framework for Corporate Insolvency ...................................................................................................4 C. Regulatory Framework for Insolvency............................................................................................................8 D. Credit risk management and informal corporate workouts ...........................................................................10 III. SUMMARY OF ASSESSMENT FINDINGS AND CONCLUSIONS ...............................................................11 IV. POLICY RECOMMENDATIONS......................................................................................................................13 EXECUTIVE SUMMARY Systems for creditor protection and credit recovery in Mauritius offer modern protections, but court proceedings do not respond to the needs of a dynamic industry. Creditor rights are based on an hybrid legal system inspired by French substantive and English procedural laws which provides for a wide range of security devices. Constraints in the systems and illiquid markets typically result in low recoveries even for secured creditors. All types of security provided for under the Civil Code are available, but the fixed and floating charges remain the preferred bank's types of security, as holders have no choice but to appoint a receiver to operate and/or dispose of the pledged assets. While these features of the law reflect a strong system, secured creditors are prejudiced by delays in the judiciary system. The legal framework for corporate insolvency in Mauritius is under review to remove the bias towards liquidation. It consists of three primary laws pertaining to traders (1888), commercial companies (Company Act 1984 and 2001), and protected cells (Protected Cell Companies Act 1999). The approach follows that of UK company law practice, only without a modern insolvency law. In practice, company liquidations produce little or no return to the unsecured creditors, and a comparatively low return even to non-banking secured creditors. There is no mechanism for rehabilitation, except with respect to Protected Cell Companies. Under the Company Act 2001, however, a debtor may enter into restructurings through amalgamations and voluntary compromises with creditors. The stronger rights afforded Banks under the fixed and floating charges enables them to take control over the company's assets, and play an important role in salvage of the business through a debt repayment plan, rescheduling or supervised restructuring. In January 2003, the GOM appointed a Steering Committee to review all aspects of insolvency and creditor rights regimes in the country with the objective of developing a new insolvency legislation. The Bankruptcy Division of the Supreme Court has jurisdiction to deal with all matters of bankruptcy, insolvency or the winding-up of companies but the Supreme Court can hear in the exercise of its original jurisdiction actions relating to the internal administration of companies which results in many cases that orders can be made in Chambers which interfere or inhibit the jurisdiction of the Judge in bankruptcy. While the courts may always play a supervisory role, the lack of a regulatory regime governing the conduct of professionals constitutes a significant shortcoming in the overall system, which is partly compensated by the appointment by the banks of receivers who are members of international accounting firms networks applying generally accepted professional standards. Nearly all corporate lending in Mauritius is secured, with unsecured lending accounting for about 2% to 7% of total corporate advances. Large domestic and foreign banks maintain relatively advanced procedures for managing credit defaults, and employ a wide-range of techniques for recovery and resolution. Smaller banks tend to have only a small or no recovery department and outsource most of the recovery work. While workout procedures have not been formalized, banks and financial institutions routinely employ workout techniques to reach amicable arrangements to reschedule debts and restructuring businesses. Banks prefer informal resolutions where possible, but exercise their power to appoint a receiver or liquidator under the floating and fixed charge instruments. Still banks complain of low recoveries and a slow court process. 1The team was led by Gordon Johnson (Lead Counsel), with assistance from Jacques Ferry (Consultant).  I. INTRODUCTION 1. The World Bank assessed the Mauritius insolvency and creditor rights systems pursuant to a joint IMF-World Bank initiative to develop reports on the observance of standards and codes ("ROSC"). The review was carried out in collaboration with the Ministry of Economic Development, Financial Services and Corporate Affairs, based on the World Bank Principles and Guidelines for Effective Insolvency and Creditor Rights Systems ("Principles")2 during the week of October 28 to November 2, 2002. The assessment team interviewed a cross section of country stakeholders regarding the effectiveness of the legal infrastructure and its implementation supporting debtor-creditor relationships, corporate insolvency and credit risk management and resolution practices. 2. Conclusions in this assessment are based largely on a review of applicable legislation and information gathered through interviews conducted by the staff team during their mission, and other inputs provided by the Steering Committee on Insolvency and Creditor Rights set up by the Government of Mauritius in January 2003.3 The mission met with the Minister of Economic Development, Financial Services and Corporate Affairs, and senior officials and staff members of: (a) the Ministry of Economic Development, Financial Services and Corporate Affairs; (b) the Registrar of the Companies and Registrar General; (c) the Deputy Commissioner, Income Tax Department; and a wide range of stakeholders, institutions and professionals in the public and private sectors, including: (d) judges; (e) accountants; and (f) lawyers and barristers. Excellent cooperation was received. 3. The conclusions in this assessment are based largely on the above interviews, a review of applicable legislation, data and information. In addition, five commercial banks provided responses to a questionnaire pertaining to credit risk management and corporate recovery practices with respect to distressed assets. The mission met with some of these responding commercial banks to discuss their practices and experience in resolving and collecting non-performing loans. II. DESCRIPTION OF COUNTRY PRACTICE 4. The legal system in Mauritius is a hybrid system of law combining both civil and common law practices. The substantive private law, except the company law and the bankruptcy law, is largely based on the Napoleonic Code while public and administrative laws draw essentially from English common law. The law relating to security interests and that relating to creditor's rights, including their enforcement, are mostly French inspired, except for the floating and fixed charges drawn from English law, and included in the Mauritian Civil Code (Civil Code). The co-existence of the two systems entails in some instances confusion in the laws interpretation and application. 2World Bank, Principles and Guidelines for Effective Insolvency and Creditor Rights Systems (April 2001), http://www.worldbank.org/ifa/rosc_icr.html. 3Major legislation reviewed included, among others, the Bankruptcy Act 1888, Companies Act 1984, Companies Act 2001, Civil Code and Code of Civil Procedure (pertaining to creation, registration and enforcement of pledges, charges and security interests), other relevant legislation, regulations and related information including the report of the Presidential Commission, chaired by Lord Mackay, to examine and report on the structure and operation of the Judicial System and Legal Professions in Mauritius, February 1998. The Bank acknowledges the assistance of Banymandhub Boolell Chambers, as an advisor to the Bank on domestic legislation and practices in relevant areas. ________________________________________________________________________________________ Mauritius-Insolvency and Creditor Rights ROSC Page 1  5. The Mauritian economy being a small economy still relies on traditional credit instruments, such as bank loans, leasing and investment lending. The upsurge in the economic activity of banks in recent years is reflected in the substantial increase in claims from the private sector4 and claims on currency with the public.5 The various types of security provided for under the Civil Code , e.g. the pledge, the mortgage and the guarantee are available, but the fixed and floating charges remain the more widely used types of security and are available only to credit institutions and a limited number of institutions specified in the law. A. CREDITOR RIGHTS AND ENFORCEMENT PROCEDURES 6. Creditor's rights, other than the special rights that may be exercised in the event of an insolvency, are governed by the Civil Code. Any creditor has a general right over the property and assets of a debtor and any creditor has the right to be treated equally with the other creditors unless priority is given to those creditors holding securities. The Civil Code lays down the rules governing the creditors' ranking upon enforcement of their rights. In addition to the securities/charges available under the Civil Code, any creditor has by law the benefit of a number of protective measures6 in order to protect his interests against the debtor and/or third parties. In practice the enforcement of such rights often prove difficult. 7. Systems for creditor protection and credit recovery in Mauritius offer modern protections, but court proceedings, do not produce timely results and the issues are not adequately addressed, and illiquid markets may result in low recoveries, especially for unsecured creditors. Unsecured debt is enforced by court action, in the first instance, by obtaining a payment order to collect on a debtor's assets. Prejudgment attachments or relief is available to prevent the disposition of assets by the debtor prior to obtaining judgment. Creditor rights are complicated partly by the hybrid nature of the legal system combining French substantive law and English procedural laws. Weaknesses in the court system are the most often cited as being detrimental to debt enforcement. Creditors report that court proceedings for execution or in bankruptcy are routinely delayed, resulting in diminished recoveries. Although statistics are not readily available, unsecured creditors report that actions in the lower courts can take 6-18 months, while proceedings in the Supreme Court can last 2-4 years. 8. Secured creditors enjoy relatively broad protections and better remedies to enforce their claims in movable and immovable property. The law provides for the traditional security interests over a broad range of assets, including: (i) security given personally by third parties to the debtor which is commonly called "cautionnement," personal guarantee or surety ("s