The present statutory framework dealing with insolvency in Mauritius is scattered among various pieces of legislations and have serious gaps that need to be addressed. Our economy has evolved and grown in sophistication in the past two decades. There is a wider variety of businesses, the economy is more globally integrated and business risk is becoming more spread and more intense. For these same reasons, many countries around the world have reformed their insolvency legislations and others are now adapting to that trend. Mauritius cannot afford to lag behind. In fact the Insolvency Bill is yet another example of Government’s commitment to adapt our legislation to the modern environment and to comply with international norms, standards and best practices. It is also crucial to our endeavour to improve the business climate in Mauritius and to ensure that the interests of all stakeholders in a business venture are fully protected, especially when companies face difficulties and become insolvent.
Consultations
This Bill has been worked out in close collaboration with the World Bank and the stakeholders in Mauritius. A Consultative Paper was issued in August 2007 on the policy proposals. It is to be noted that the World Bank submitted the “Report on the Observance of Standards and Codes” (ROSC) of Insolvency and Creditor Rights Systems for Mauritius” in March 2004. A Steering Committee on Insolvency and creditor rights was appointed to work with the World Bank in the development of its report. Prior to the issue of the final report, a dissemination seminar was held in 2004, with the widest possible participation, among whom there were lawyers, accountants, bankers and other professionals. A number of policy recommendations were discussed and incorporated in the final report. Following these consultations the Bill has been finalized with the assistance of Professor Mc Kenzie from New Zealand who also drafted the Companies Act 2001 and the Companies Act 1984. We have also drawn on the experience of other countries, including Australia, Canada, Malaysia, New Zealand, Singapore and UK to finalise the Bill.
Consolidating and modernizing the legal framework
The most pressing reform of the insolvency legislation relates to the need for consolidation. Presently, the process for corporate insolvencies i.e. winding up, receivership and liquidation of companies are dealt with in the Companies Act 1984. The parts relating to these processes were not repealed by the Companies Act 2001. Individual insolvencies are dealt with in two separate statutes namely the Bankruptcy Ordinance of 1888 and the Insolvency Act 1982. The Insolvency Act 1982 which is essentially the Insolvency Ordinance of 1856 deals with the insolvency of individual non-traders while the Bankruptcy Ordinance of 1888 deals with the insolvency of individual traders. Part of insolvency is dealt with in the Code Civil Mauricien and governed by many laws, including the outmoded law for trader (1888) and more recent company legislation that supports a variety of procedures for voluntary and compulsory winding-up. The Bill will update and integrate the current fragmented framework in one modern, omnibus legislation.
The Priority of Claims in Liquidation – enhancing employee protection (Schedule 4)
Another crucial area where the law is modernized relates to the treatment of employee rights. Liquidation of a company under the existing legal framework produces little or no return to the unsecured creditors and a comparatively low return even to non-bank secured creditors. This Bill reviews the process in order to give greater protection to employees while at the same time protecting the priority of secured creditors under their respective security instruments. The Bill redefines the priority of claims in the distribution of assets in liquidation and gives workers’ unpaid salary higher priority than the secured creditors. Under present legislation workers claim are treated pari-pasu with the claims of secured creditors.
It is clear that the salary of workers, the bread earners in the family will get higher priority in the insolvency process than is presently the case. We need to put the focus on preventing and minimizing the human sufferings that closing down businesses can cause. This should be our primary concern and it has been our primary concern in this Bill. In fact, the higher priority of claims being given to workers’ salaries is not the only way in which this new legislation gives greater protection to workers. The fact that this Bill puts a big focus on saving the company through alternative means to liquidation and provides for liquidation to come as a very last resort and not as easily as it does presently is a significant step forward to protect employment and the employees. I will elaborate on this important feature of the Bill in greater details.
The other striking reforms in the area of claims relates to Government revenue. Presently, Government can claim from a company in liquidation, all the amount due to it. Under the new legislation, collection of these dues will be restricted to the amount due in one year.
The Insolvency Bill is, therefore, setting out (in the Fifth Schedule) a new order of ranking of creditor claims following a survey of existing practices adopted by 15 countries, and takes into consideration suggestions received during the public consultation process. The list of ranking will now be in the legislation in contrast to the present situation where there is no statutory list. These proposals would benefit all stakeholders (shareholders, creditors, employees, the State) by giving them a fair share in the distribution of realised assets at each stage of the process.
Setting in place alternative measures to bankruptcy (Part II- subpart IV)
Indeed, another major weakness of the present legal framework for corporate insolvency is its bias towards liquidation. In many circumstances, companies are placed into liquidation when alternative resolutions might be possible or even less costly. This Bill corrects this bias. It provides for rehabilitation procedures that permit quick and easy access to the process of rehabilitation, providing sufficient protection for all those involved, providing a structure that permits the negotiation of a commercial plan, enabling the majority of creditors in favour of the plan or other course of action to bind all other creditors by the democratic exercise of voting rights and providing for judicial or other supervision to ensure that the process is not subject to manipulation or abuse.
This Bill provides procedures for two important alternatives to winding up – these are: (i) workouts and (ii) voluntary administration.
Workouts
Workouts are out-of-court debt restructurings. This has now become a global reality and a widespread practice. These debt restructurings are handled by professional insolvency and restructuring practitioners and are usually less expensive and painful as an alternative to outright bankruptcies. This instrument provides an avenue to enterprises to reduce and/or renegotiate its bad debts in order to improve or restore liquidity and rehabilitate the enterprise so that it can continue its operations. Thus workouts are a rehabilitation mechanism to remodel the financial and organizational structure of debtors experiencing financial distress so as to permit the continuation of their business. The rehabilitation procedures, therefore, give a debtor/enterprise an opportunity to recover from its temporary financial difficulties, and to provide it with an opportunity to restructure its operations. Where rehabilitation is possible, such an approach will be a preferred option as the continued operation of the enterprise will enhance the value of the assets as opposed to liquidation and that production unit can be sold as going concern to minimize hardship on shareholders, creditors and workers.
The Bill provides for directed workouts for prescribed companies - those companies which by reason of the nature and scale of activities or the number of employees, has a material impact on the national economy. The Bill provides for the establishment of a Companies Supervisory Committee, one member of which is appointed by the FSC, one member by the BOM, three members appointed by the Minister from the private sector, and the Registrar of Companies. The Committee is given power to review the activities of prescribed companies and take steps where reasonably practicable to rehabilitate those companies that are encountering financial difficulties.
Voluntary Administration (Part III, subpart IV – s 215 to s 303)
Voluntary Administration is another alternative to liquidation that is provided for in the Bill. In some of the major jurisdictions, including UK, New Zealand, and Australia the introduction of voluntary administration saw an immediate buy-in, and it has since become the dominant formal procedure in times of financial distress. The consequences of administration include the following:
- Directors retain their positions, but are unable to exercise any of their powers without the written consent of the administrator;
- Any transaction affecting the company’s property is void unless made with the consent of the administrator, or with leave of the Court;
- A moratorium is placed on the rights of owners, or lessors of property in possession of the company;
- There is a moratorium on all proceedings against the company. Creditors can however resolve to liquidate the company;
- The administrator takes over the management and control of the company and, amongst other powers, may carry on or terminate the business, dispose of the company’s property, and remove directors;
- The administrator may also sell property subject to a charge, if this is done in the ordinary course of business, or with leave of the Court. However, the secured creditors can still enforce its security even if an administrator is appointed.
The administrator is required to hold meetings of creditors within a strict time frame, investigate the affairs of the company and within 21 days of his appointment to convene a meeting of creditors, inform them as to the affairs of the company and give his opinion on whether the creditors should either enter into a deed of arrangement; terminate the administration; or wind up the company.
Thus the Insolvency Bill proposes a four-phased process:
- Restructuring/Work outs
- Administration Receiver/Manager
- Liquidation
Liquidation will only take place when there is absolutely no hope of restoring an insolvent person or corporation.
The present legal framework is very vague on who can act as liquidator, how much they can charge and what are their powers. In contrast the Bill requires that a liquidator be registered with the Insolvency Service. The fees charged by the liquidator will also be governed by the Bill and should not exceed 15% of the distributable proceeds. The Bill also brings together in one place a statement on the powers and duties of the liquidator.
The Bill provides for continued supply of essential services for a short period of time to companies that are being sold as a going concern.
Individual insolvency (Part II)
As regards individual insolvency, separate regimes exist presently – the Bankruptcy Act (1888) for traders and the Insolvency Act 1982 for non-traders. Although there is a broad similarity between the two regimes, there are a large number of procedural differences- because the Bankruptcy Act is derived from the English bankruptcy statute and the Insolvency Act is related to the Code Civil Mauricien. This weakness will be addressed by having one single legislation to govern all insolvency matters.
In a number of respects, there is an intersection between the individual and corporate regimes, i.e. references are made to the Companies Act as well as the Bankruptcy Act. Thus at the time the Companies Act 2001 was enacted, certain of the provisions of the Companies Act 1984 dealing with corporate insolvency matters were not repealed as it was felt that such issues would be better addressed in a comprehensive insolvency legislation covering both individual and corporate bankruptcies. The Insolvency Bill repeals the remaining provisions of the Companies Act 1984, the Bankruptcy Ordinance 1888 and the Insolvency Act 1982.
An important change in this Bill regarding individual insolvency relates to application by a bankrupt for discharge. The present Bankruptcy Act provides in s.29 for a bankrupt to apply for discharge at any time after being adjudged bankrupt. The Court may grant, refuse or suspend discharge under s.30. However, many bankrupts never apply for discharge. As undischarged bankrupts, they present some hazard to the commercial community as their capacity to enter into further indebtedness is limited and they may not, without risk to those whom they contract with, re-enter into the control or management of a business. The practice in modern bankruptcy Acts is to provide for automatic discharge after a stated period of time, usually three years. A bankrupt who wishes to apply for discharge at some earlier date is able to do so and whether or not the application is granted is subject to the discretion of the Court in the usual way. In the case of an automatic discharge, any creditor or the Official Receiver may lodge with the Court an objection to the bankrupt’s discharge. If an objection is filed, then the Court will hear any representations made by the Official Receiver and creditors, and if appropriate grounds are established, the Court may refuse to grant a discharge or grant a discharge subject to such conditions as the Court thinks fit, including an order for regular payments to be made by the bankrupt in reduction of his indebtedness for such period of time as the order provides.
The Insolvency Bill makes provision in clause 97 for the automatic discharge of a bankrupt upon the expiration of three years from the date of adjudication in bankruptcy. In the case of a Summary Administration under clause 34, the period is two years.
Cross-border insolvency (Schedule 10th)
A new regime which is included in the Bill in order to address the problems which arise from cross-border insolvency, i.e where, in the case of an individual or company insolvency, assets are held in more than one jurisdiction and creditors may be located in a number of jurisdictions. Important issues arise for Mauritius in this area because of the significance of the global business sector. It is important that there are clear and well understood rules governing the insolvency of global business companies incorporated in Mauritius and also governing those respects in which such companies can form part of, or operate outside of, an international insolvency administration. The Bill thus provides for Mauritius to adopt the UNCITRAL model law on cross-border insolvency which has been adopted by a number of jurisdictions. It is set out in the 10th Schedule. The Schedule will, however not come into operation until there is sufficient reciprocity in dealing with insolvencies in jurisdictions that have trading or financial connections with Mauritius, or that it is otherwise in the public interest. For the regime to be workable, it is desirable that there be some mutuality between affected jurisdictions so that the principal countries with which Mauritius has grading or financial connections either have adopted the UNCITRAL regime or have compatible regimes. Special provision is made in clause 132(4) for deposit taking institutions, mutual funds and life insurance companies, conferring on the Court power to segregate assets so as to give priority for payment to local depositors or investors. This Bill is therefore a significant step towards the modernization of Mauritius insolvency system to deal with cross-border insolvency proceedings.
Netting arrangements in financial contracts (Part V – clauses 338-363)
Another crucial coverage of this Bill is the introduction of a new set of statutory provisions dealing with netting arrangements in financial contracts. It provides for the netting of certain financial contracts, both in and outside of insolvency. It also provides rules relating to the law to be applied to intermediaries in relation to the maintaining of securities accounts and ‘intermediary’ is defined in clause 338(3) and covers a person who, in the course of business or other regular activity, maintains securities accounts for others or both for others and for its own accounts. Sharebrokers, futures dealers, money market dealers, investment bankers and merchant bankers would come within this description. These rules have importance in relation to a number of financial transactions, particularly international financial transactions, where arrangements are entered into for the netting between parties of their respective positions where the parties are subjected to payment or delivery obligations at some future point of time. Where the positions are closed out, the parties will net off their obligations. In the absence of legislation, major difficulties can arise if one of the parties becomes insolvent and unable to honour its part of the netting obligation. It is important that payment systems, particularly those which can impact in a systemic way more widely on the financial system, be protected from insolvency laws that could otherwise jeopardize finality and the irrevocability of transactions. The Bill provides statutory support for the enforcement of netting arrangements in relation to certain qualified financial transactions in the event of the insolvency of one of the participants.
In line with the recommendations of the Mackay Report, the Insolvency Legislation has been prepared on the assumption that a Commercial Court would be established to handle both commercial and bankruptcy matters. A Commercial Division of the Supreme Court is already operational since January 2009 where corporate cases are being attended to.
The provisions relating to receiverships and winding up matters under the Companies Act 1984 will be repealed with the coming into force of the insolvency law, and its administration would remain with the Registrar of Companies. The proposed “Insolvency Service” would operate as a Unit of the Registrar of Companies as is the case in other jurisdictions.
Another salient feature of the Bill, is the placing of additional responsibilities on directors of companies in the exercise of their duties, including procedures for public examination of directors and debtors by the Official Receiver / Court to prevent recurrence of delinquent behaviour and a sanction mechanism (clause 52, 3rd schedule).
Conclusion
The Insolvency Bill reflects the objectives of Government to implement an insolvency regime that effectively balances the interests of debtors and creditors. This has not been a simple task. We strongly believe that the legislation before the House will make insolvency proceedings more transparent and less painful. Under this new legal framework, insolvency will not happen in an opaque world bereft of accountability. This Bill also gets the balance of regulation right so that all stakeholders affected by insolvency have confidence in the process. This Bill will also secure the reputation of Mauritius as a well governed business and financial services center and a trustworthy investment destination. It will shore up corporate goodwill. With the passing of the current Bill, the Companies Act 2001 and the Insolvency legislation would become the two most important set of laws governing the corporate sector. Together they will enhance corporate governance and corporate ethics, and allow creditors to put in place the management of troubled firms, and in this way create incentives for prudent corporate behaviour.
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