The misuse of fixed and floating charges by leasing companies to guarantee the repayment of rents in Mauritius
Siv Potayya
Wortels Lexus, Port Louis
At the beginning of the nineteenth century, Mauritius, then a British colony, saw its first bank unveiling on its soil; however, the remedy to guarantee the repayment of banking facilities was mostly of French origin. In 1808, it had inherited the Code Napoleon, which dealt mainly with personal guarantee; regarding real guarantee, the Code did provide for mortgages ‘les hypothèques’.
In the late 1960s, after obtaining its independence from the British Empire, Mauritius slowly embarked on a process of diversification of its economy. Textiles, manufacturing industries and tourism had been the new economic pillars embraced by the then-leaders of the country. As Mauritius successfully moved away from a monocrop agricultural economy, a pressing need for capital to finance projects was no doubt felt to be critical: the banks were astute enough to devise modern collaterals in line with the banking industry worldwide to cater for their banking facilities to investors and the public at large. Thus, in 1969, the young independent country enacted for the first time legislation dealing with fixed and floating charges, designated as the Loans, Charges and Privileges (Authorised Bodies) Act, which specifically created the fixed charge and the floating charge.
New loan instruments were designed and introduced in the financial sector pursuant to the Mauritian laws. The fixed charge was mainly devised to create a guarantee over assets of a company, comprising immovable and movable properties of a company such as land and buildings, vehicles, raw materials and equipment. Pursuant to a fixed charge, the disposal of any property by the borrower is subject to the lender’s consent.
On the other hand, a floating charge is a security created on the floating assets of a company, meaning the changing and evolving assets of a company. Such a charge is designed to create a security or charge mainly in the stocks of the borrower. It enables the borrower to dispose any of the finished goods without having to seek prior approval from the lender. In other words, a promoter of a textile company from an overseas company did not have to seek authorisation from the lender before disposing/exporting the finished goods contrary to the requirement under a fixed charge. It is worth noting that both the floating and fixed charges keep their ranking as from the date of their inscription at the office of the Registrar of Mortgages.
That legislation was repealed in 1983 and inserted under the articles of the Mauritian Civil Code (MCC). The relevant part, under Article 2202-3, reads as follows:
‘A la suite ou dans la perspective d'un prêt, d'une avance ou d'un paiement ou toute autre obligation consenti ou effectué par une institution agréée, au bénéfice d'une personne quelconque ou pour le compte de celle-ci, tout ou partie des biens du débiteur ou de sa caution peuvent être volontairement grevés d'une sûreté, fixe ou flottante, en garantie de la somme due, ainsi que des intérêts, commissions et frais en découlant”.
This is translated as follows:
‘Following or in the context of a loan, an advance or payment or other obligation made or performed by an approved institution for the benefit of any person or on behalf of it while or part of the debtor's property or the guarantor’s may be voluntarily subject to a fixed or floating charge, as security for the amount due, plus interest, fees, commissions and expenses arising therefrom.
What would be the qualification ascribed to the expression ‘other obligation’? When this enactment was passed, the legislator had in mind all business between banks and insurance companies as lenders and, on the other hand, the investors in the manufacturing sector as borrowers. There is a list of those financial institutions – ‘the approved institution’ – which may benefit from those charges; over time, some leasing companies have found themselves therein. Would this mean that they can avail themselves of such security title to guarantee the repayment of rents? The expression ‘other obligations’ has not yet been interpreted by the country's Supreme Court and it should necessarily relate to a loan facility.
Is it proper to take fixed and floating charges to guarantee the repayment of rents where the leasing company still remains the owner of the property so leased? A lease agreement is defined as follows:
‘A contract between a lessor and lessee that allows the lessee rights to the use of a property owned or managed by the lessor for a period of time. The agreement does not provide ownership rights to the lessee; however, the lessor may grant certain allowances to modify change or otherwise adapt the property to suit the needs of the lessee. During the lease period, the lessee is responsible for the condition of the property.’
Over the years, the fixed and floating charges have been and are being misused, and there is a departure from the intended initial role. They are now being resorted to by leasing companies to guarantee rents payable for leased equipment or materials to companies. Is this legal?
Leasing companies already create a ‘nantissement’ (pledge) when the lease agreement is executed between the lessor and the lessee. The nantissement is divided into two parts: the ‘gage’ for movable properties and ‘l’antichrèse’ for immovable properties. In turn, the gage is divided into two parts: ‘le gage sans déplacement’ (pledge without displacement), and le gage avec déplacement (pledge with displacement). In the first instance, the property remains in the custody of the lessee and in the second one the lessor retains title of ownership.
As far as leasing companies are concerned, the property will be subject of a pledge without displacement given that the property will be in the custody of the lessee – eg, someone wishing to obtain manufacturing machines and equipment on lease. The leasing company will purchase those machines and equipment for it while remaining the owner and will lease it over in consideration of the repayment of rents. Under the provisions of Article 2114 of the MCC, this pledge may be made by way of an authentic deed or under private signature and is subject to some other formality for its validity and the ranking of the leasing company over the equipment.
The gage sans déplacement is the appropriate guarantee instrument in leasing transactions. By what stretch of imagination are the leasing companies misusing fixed and floating charges over other properties of the borrower and/or guarantor to guarantee the repayment of rents is a question to be decided in due course by the country's Supreme Court!
I had the opportunity to discuss that point with Professor Robert Garron, who, along with the late Edwin Venchard QC, drafted the major changes to the country's civil code in 1983. Fixed and floating charges are not designed to guarantee rents resulting out of a leasing agreement.
In any event, in the case of the pledge without displacement, the leasing company will enjoy a first ranking, subject to the formality alluded to above under Article 2114 of the MCC. The following case is an illustration. In Mauritius Commercial Bank Limited (MCB) v the Mauritius Co-operative Central Bank Limited (MCCB) 1993 SCJ 340,1 the facts were revealed as follows.
MCB Ltd (the lending bank) granted banking facilities to Silmac Recovery (Mauritius) Limited against a floating charge in their favour for MUR 9.5m on all its assets, both present and future.
The floating charge was inscribed on 29 January 1988, then crystallised and converted into a fixed charge on 3 April 1989. In the meantime, Silmac Recovery (Mauritius) Limited borrowed MUR 435,000 from the MCCB and purchased a car on 13 September 1988. Said loan was secured by a pledge without displacement on the car. On 13 April 1989, MCCB realised its privilege and caused the car to be seized. The car was sold at a public auction held on 19 May 1989 for MUR 240,000. The MCB held the view that the sale price should not be paid to the MCCB on the ground that, being a secured creditor by virtue of its charge, it had priority over the MCCB in respect of the proceeds of the sale. The Court held that the pledge without displacement had priority.
On top of enjoying the benefit of the pledge without displacement along with a first ranking, are the leasing companies not engaging in abuse by resorting to fixed and floating charges to guarantee the repayment of the rents?
1 1993 SCJ 340: Supreme Court Judgment no 340 of 1993