First published in Appleby's Mauritius Newsletter, August 2019
A fundamental question that arises during secured debt financing transactions is which type of security would provide the lender with more advantageous options vis-à-vis any other creditors of the obligor. The article seeks to highlight the main factors that affect a lender's choice when it comes to taking security in Mauritius.
The most common types of security taken in Mauritius are either a charge over the assets of the obligor, that is, the Mauritian entity, or a pledge over either the shares of the Mauritian entity, granted by its shareholders or over the bank accounts of the Mauritian entity.
A charge generally takes the form of either a fixed charge over all assets of the chargor, fully particularised in the instrument of charge; and all related rights thereto, or of a floating charge over all assets, whatsoever and wheresoever of the chargor, both present and future, other than any assets validly and effectively charged by way of fixed charge pursuant to the instrument of charge.
A pledge on the other hand, generally takes the form of a share pledge or account pledge. In terms of creation and validity of the security interests, in accordance with our Civil Code and notwithstanding the contractual date of any fixed and/or floating charge, a fixed and/or floating charge shall only be deemed to be (i) validly created and perfected, and (ii) effective from the time that the charge has been duly registered with the Registrar General (RG) and inscribed with the Conservator of Mortgages of Mauritius (CM).
A share pledge is deemed to be validly created where a transfer evidencing the pledge is inscribed in the register of pledges of the Mauritian company whose shares are being pledged. For the purposes of the Commercial Code the "gage" is deemed to be constituted where (i) the shares and share certificates (if any) are delivered to the creditor or security agent, along with (ii) a stock transfer form allowing the transfer of the shares to the creditor or security agent or any person of its choice.
An account pledge is validly created and perfected in law immediately upon entry by the parties into the account pledge and subject to the drawing up, execution and delivery of the certain mandatory creation and perfection deliverables at closing.
What affects a lender's choice?
Ranking and Priority
Any fixed and/or floating charge registered and inscribed pursuant to applicable law will take priority over any other charge which is registered and inscribed subsequently relating to the same assets and/or any unsecured charge at enforcement and in case of insolvency. A pledge cannot be registered and inscribed under Mauritius law, and will therefore be deemed to be unsecured and unranked from a certainty and/or priority perspective, especially upon insolvency of the Mauritian obligor. A pledge can only be registered; however, this does not guarantee priority. Most lenders therefore prefer to take a charge over a pledge in order to acquire priority over any other unsecured creditors of the Mauritian obligor, particularly where the charge has been duly registered and inscribed with the RG and CM in Mauritius.
Mauritius law governed fixed and/or floating charges confer a right on a security holder, in law, to look to (or appropriate), by either a power of sale or the appointment of a receiver, such assets as were existing and specifically designated in the deed of fixed and/or floating charge in the event of a obligor's default. Once such assets are burdened by way of fixed charge, the obligor is prohibited from dealing with and alienation of such assets, without the consent of the security holder, which would otherwise give rise to a criminal offence under Mauritius law. In relation to floating charges governed under the laws of Mauritius, the assets do not have to be particularised in the deed of charge and the obligor can continue to use/trade the assets until an enforcement event occurs and the floating charge then becomes a fixed charge. In terms of enforcement, in practice, the agreement/instrument creating the charge itself provides for the circumstances in which a charge and the security created shall become enforceable.
In virtue of the enforcement deliverables provided under the share pledge, the pledgee or security agent may exercise any of its rights under the share pledge, including the right to appropriate, transfer all or any part of the pledged assets, in or towards payment or discharge of the liabilities/secured indebtedness pursuant to the share pledge by completing, executing and dating (where applicable) certain mandatory deliverables for the purposes of enforcement and the right to appoint a receiver of the pledged assets pursuant to the terms of the share pledge.
For an account pledge, the pledgee or security agent may exercise any of its rights under the account pledge, including the right to appoint a receiver of the pledged assets pursuant to the terms of the account pledge and/or the right to appropriate, transfer or set off all or any part of the monies in the pledged accounts, in or towards payment or discharge of the liabilities/secured indebtedness pursuant to the account pledge.
Whilst a charge confers priority to the secured lender, enforcement of a pledge is more straight forward than enforcement of a charge, more so when a floating charge is involved, which should be agreed prior to enforcement.
Another factor that may affect the lenders' choice is whether a non-Mauritian entity is granting the security. In the event a non-Mauritian entity is granting a security in favour of its assets in Mauritius, for instance, a bank account in Mauritius, it is recommended that a pledge be taken rather than a charge. As mentioned above, a pledge cannot be inscribed with the CM in Mauritius but can only be registered with the RG and registration only does not confer priority. A charge can be registered and inscribed following which the secured creditor has priority over all claims against the company upon its insolvency (applicable to Mauritian entities) pursuant to the Mauritius Insolvency Act. Where a non-Mauritian chargor is involved, such purpose of registering and inscribing a charge document would be redundant to the secured creditor or security agent.