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Enforcement Of Security Interests In Voluntary Administration

In 2009, Mauritius overhauled its insolvency legislation with the enactment of the new Insolvency Act 2009 (the "Act"). For companies, the Act introduced voluntary administration as a new form of insolvency procedure alongside the traditional ones of liquidation and receivership. The objective of voluntary administration is to achieve as much corporate or business rescue as is possible or, failing that, a better return for creditors than in liquidation.


Creditors of a company in voluntary administration are required to vote at a "watershed meeting" on one of three exit routes from administration, namely (1) the execution of a restructuring plan called "deed of company arrangement", (2) the termination of administration and returning control of the company to its directors or (3) the liquidation of the company.

One of the hallmarks of voluntary administration is that during the process, a statutory moratorium operates to protect the company against claims from and stripping of assets by individual creditors. The purpose of such moratorium is to maximize the chances of achieving corporate or business rescue. Notably, no person shall enforce a charge over property of the company except with the administrator's written consent or with the permission of the Court.


It is open to a secured creditor to apply to the Court to obtain leave to enforce its security and the Court may make such an order where it is satisfied that in all the circumstances, serious prejudice will be caused to the secured creditor if the application is not granted which outweighs the prejudice caused to the other creditors arising from the granting of the application - section 251 of Act.

The first decision on a section 251 application was handed down recently. In The Mauritius Commercial Bank Limited v Hajee Abdoula 2016 SCJ 304, the bank was dissatisfied with the appointment by the directors of two companies of an administrator. The bank promptly appointed a receiver and manager over those companies, and applied to the Court under section 251 for leave to enforce its security.


The bank's case largely revolved around events which took place in a previous injunction application by the companies seeking interim orders restraining the bank from enforcing its security. The bank gave an undertaking that it would not enforce certain share pledges but made it clear that it intended to appoint a receiver. In the light of such undertaking, the companies withdrew their injunction application but their directors proceeded to appoint the administrator on the same day.

The bank's section 251 application was resisted by the administrator. The Court, after having rejected certain procedural objections about the application raised by the administrator, went on to grant leave to the bank to enforce its security. The judge accepted the bank's evidence to the effect that: (1) the bank debt amounted to some 98% of the total debts of the two companies and the latter did not have any business other than to hold the assets over which the bank had security; and (2) the appointment of the administrator by the companies was made in ambush, in bad faith and as part of a plan to prevent the bank from enforcing its security.


As a practical application of section 251 of the Act, the decision will be welcome to secured lenders. One can also see the commercial sense of the judgment, in circumstances where the bank was the overwhelming creditor of the companies and there was no business as such to restructure for the benefit of creditors as a whole.

Some aspects of the judgment nevertheless call for further consideration.

First, the judge was willing to accept what she considered to be the unrebutted evidence of the bank. When a secured creditor applies for leave to enforce security, section 251 itself provides that the administrator shall, within 7 days of receiving the application, file a notice informing the Court whether he supports or opposes the application. At the same time, the administrator is required to provide a statement of reasons in support or opposition. It was accepted in the judgment that there was no requirement in the law for the administrator to file an affidavit and that he had, in this case, complied with the law by filing his notice of objection. Nevertheless, the judge concluded that only the bank's affidavit was on record, that there was no evidence on the part of the administrator and, therefore, the bank's evidence stood unrebutted.


Secondly, the judgment does not undertake a detailed analysis of how the test of prejudice laid down in section 251 was satisfied, i.e. that the prejudice caused to the bank if leave were not granted outweighed the prejudice caused to other creditors arising from the granting of leave. This could arguably be implicit in the light of the proportion of the bank debt to the total debt, and of the fact that the companies were only here to hold the charged assets, but the judgment does not expressly state those factors as being the determining ones which led to the prejudice test being satisfied. The judgment instead focused on the circumstances (not the legality) of appointment of the administrator, but did not analyze what harm exactly would have been caused to the bank by the mere fact of appointment. One needs to bear in mind that regardless of who appoints an administrator, his duties are laid down in the Insolvency Act and he is subject to the supervision of the Court. Indeed, section 281 of the Act gives the Court the power to make any order it thinks appropriate where it is satisfied that: (1) an administrator's management of the company?s business, property or affairs is prejudicial to the interests of some or all of the company's creditors or shareholders; or (2) an administrator's conduct or proposed conduct has been or will be prejudicial to those interests.


 

Mushtaq Namdarkhan

Senior Associate, BLC Robert & Associates