Receivership - Does a fixed charge rank ahead of a banking or fiscal privilege?

In considering the type of security it will take, a lender will want to ensure that its security has not only been validly created and perfected but also that such security ranks as expected against other competing interests. Such lender will also need to be fully aware of the distribution waterfall in case of default or of insolvency proceedings. In a financial transaction, disputes about priority are typically avoided by private agreements such as intercreditor agreements. However, one also needs to consider whether there are certain legal interests which could prime over first ranking security interests. This article seeks to analyse this question of priority and provide further guidance thereon.

In a situation of private lending and contractual enforcement, repayment waterfalls are typically provided by the loan agreement given that the laws of Mauritius do not provide any statutory waterfall.

In the case of enforcement in the event of insolvency, the ranking of security interests depends on the classification of the security, the type of security and the date of inscription. Thus, upon a borrower’s entry into liquidation, the Insolvency Act prescribes a mandatory statutory order of priority. However, one should note that no statutory priority order has been provided for receiverships by the Insolvency Act.

In the judgment of Heeralall N. v Director-General, Mauritius Revenue Authority (2024 SCJ 56), the Supreme Court of Mauritius in its appellate jurisdiction has considered the ranking of creditors in a situation of receivership. The case involves a receiver and manager of a debtor company, Mr. Nirmall Heeralall, appointed by the creditor bank, Mauritius Commercial Bank (MCB) appealing against the Mauritius Revenue Authority (MRA) regarding priority of claims on the company’s assets. At issue was whether in a situation of receivership, the earlier inscribed fixed and floating charge of the MCB ranks ahead of the fiscal privilege inscribed by the MRA for unpaid taxes.

Section 204(1) of the Insolvency Act (IA) sets out that following his appointment under a charge document, the receiver must pay moneys received by him to the charge of the charge by virtue of which he was appointed in or towards satisfaction of the debt secured by the charge. These payments would however remain subject to the rights of persons entitled to payment and in respect of which priority has been prescribed. In the absence of regulations made for receiverships under Section 204 of the Insolvency Act, one needs to go back to the Civil Code to ascertain any question of priority in the case of appointment of a receiver to realise secured assets under a charge.

One would note further that Article 2202-54 of the Civil Code provides that a fixed or floating charge takes precedence over all privileges, preferential rights, mortgages, or other securities that only take effect with respect to third parties after its registration. The said article also provides that subject to the interest of creditors or third parties, a cession of priority may be validly granted between the holder of a fixed or floating charge and the holder of a privilege, right of preference, mortgage or other security.

An investor would therefore consider that such a type of security as a fixed charge would be first ranking in priority. However, it is important to note that Article 2202-55 of the Civil Code provides that privileges set up under Articles 2148¹, 2150-1² and 2152³ of the Civil Code have priority over any fixed and floating charge although such privileges may be uninscribed. This provision as far as Articles 2148 and 2152 are concerned will be subject to the following sub-paragraphs (2) and (3) of the said Article 2202-54:

1. First rank fixed or floating charges registered more than three years and established as security for loans, credit, advances or payments destined for professional, industrial, commercial, agricultural, artisanal or hotel investment are deemed to be of the same rank as the privilege of employees mentioned in Articles 2148-1 and 2152-1 of the Civil Code and therefore compete with this privilege.
2. The aforementioned fixed or floating charges at (a) have priority over the other privileges listed in Articles 2148 and 2152.

In the Heeralall case, the Judges analysed the various legislations and the question of priority of payment in a situation of receivership as regards taxes due to the MRA as opposed to a debt owed and secured by a fixed charge. The Judges concluded that:

• The legislator has until now not prescribed the ranking of claims of preferential and secured creditors entitled to payment out of the assets of a company in receivership.
• From a reading of articles 2148 and 2152 that the MRA is a créancier privilégié in respect of tax payable by a debtor and it ranks third after the wages of workmen and judicial costs. The privilege of articles 2148 and 2152 is relieved of the necessity of inscription.
• As for article 2149, it provides, inter alia, that any tax due shall be privileged in respect of tax payable for a maximum period of one year. This does not however apply in the case where the MRA has inscribed its privilege by virtue of section 21L of the Mauritius Revenue Authority Act. However such inscribed privilege will rank after any other charge which was inscribed before the MRA as was the case with the MCB’s charge in the case at hand.
• The final order of priority was found to be:
  (i) The MRA would therefore be entitled to recoup tax payable for a maximum period of one year;
  (ii) The MCB would then be entitled to recover the amount of its debt for the full amount;
  (iii) The MRA would thereafter be entitled to recover any outstanding amount.

The above analysis has covered a fiscal privilege so far but one needs to consider the position as regards banks and the privilege accorded to them versus another lender. To do so, one needs to consider the provisions of Articles 2150-1 to 2150-6⁴ of the Civil Code and the main points to note are that:

• Following the grant of a loan, an advance or another banking facility to a debtor, a bank established in accordance with the provisions of the Banking Act holds a special privilege over the sums that credit the account(s) of such debtor to whom this loan, advance or other banking facility was granted or his guarantor, without it being necessary to have this privilege registered;
• A bank established in accordance with the provisions of the Banking Act of Mauritius means a company incorporated under the Companies Act of Mauritius, or a branch of a company incorporated abroad, which is licensed under section 7(5) of the said Banking Act to provide certain banking businesses;
• The special banking privilege only guarantees debts resulting from a loan, advance or other banking facility granted in writing, and is exercised in preference to all other creditors of the client or his guarantor;
• The beneficiary bank may waive the rights it holds under such privilege;
• Unless waived, the special privilege takes effect from the execution of the document setting up the loan, the advance or the other banking facility, and retains its effects until full payment of the sum due by the client or his guarantor, as well as any attached interests, commissions or costs;
• The bank shall be entitled to set-off between the debt secured by its special privilege, when it is payable, and the sum(s) crediting the accounts it holds in the name of the debtor or his guarantor.

The aforementioned special banking privilege was considered in M.I.Roheemun v. State Commercial Bank Ltd (2013 INT 86). The case involved a dispute between the plaintiff and the defendant following the grant of a loan by the defendant to the plaintiff and the withdrawal of funds by the plaintiff which funds were supposed to be used to pay his other outstanding debts. The defendant exercised its rights to put a halt on the plaintiff’s accounts under Article 2150-1 of the Civil Code following a breach by the plaintiff of an essential condition attached to the loan. The plaintiff sought a judgement ordering the defendant to pay Rs 500,000 with interest for allegedly depriving him of his lawful salary. The plaintiff claimed he was unable to withdraw money from his savings account for 8 months after the defendant placed a hold on his account and made him suffer prejudice.

The Magistrate found that:

• Under the heading; “III – Du privilège spécial au profit des banques “, articles 2150-1 to 2150-6 of the Code Civil, which are specific to the Mauritian Civil Code, banks established under the Banking Act are given protection to secure repayment of loans or advances granted.
• The defendant (bank) did not abuse its position by putting a halt on the plaintiff’s bank account given the circumstances;
• The plaintiff was largely responsible for his situation by withdrawing funds meant to settle his loans;
• The plaintiff failed to prove his case and the defendant bank could not be said to have acted for no valid reason whatsoever or that it acted intentionally to harm the plaintiff.

Our conclusion is that upon considering a fixed and floating charge, a lender must consider and be aware the special privileges available to the banks (governed by the Banking Act of Mauritius) and to the revenue authority of Mauritius as such privileges may rank ahead of a fixed and/or floating charge.

¹ 2148. Les créances privilégiées sur la généralité des meubles sont les suivantes, et s’exercent dans l’ordre suivant—
1° les rémunérations de toute nature dues aux salariés et apprentis pour les cent-vingt derniers jours de travail, y compris les indemnités de licenciement et de congés payés, déduction faite des acomptes déjà perçus;
2° les frais de justice;
3° sous réserve des dispositions de l’article 2149, les créances de l’Etat, du Trésor Public, du fisc, de l’administration des douanes et des collectivités publiques ou des institutions publiques, à raison—
des impôts, contributions, droits ou taxes, de toute nature, tant directs qu’indirects;
des prélèvements ou cotisations de sécurité sociale dus en application du National
Pensions Act;
des amendes pénales et des frais de recouvrement de celles-ci;
4° les frais funéraires;
5° les frais quelconques de la dernière maladie, qu’elle qu’en ait été la terminaison, concurremment entre ceux à qui ils sont dus;
6° les rémunérations de toute nature dues aux salariés et aux apprentis pour les six derniers mois de travail, déduction faite des acomptes déjà reçus et des sommes perçues en application des dispositions du 1° ci-dessus;
7° les fournitures des subsistances faites au débiteur et à sa famille pendant la dernière année;
8° la créance de la victime de l’accident, ou de ses ayants droit, relative aux frais médicaux, pharmaceutiques et funéraires, ainsi qu’aux indemnités allouées à la suite de l’incapacité temporaire de travail.

Des lois spéciales mauriciennes créent, au profit de certaines institutions, un privilege dont le rang le place immédiatement après les privilèges énumérés au présent article.

² 2150-1. Toute banque établie conformément aux dispositions du Banking Act dispose, à la suite d’un prêt, d’une avance, ou autre facilité bancaire, d’un privilège spécial sur la ou les sommes qui figurent au crédit de tous comptes qu’elle tient au nom du client à, qui ce prêt, cette avance ou autre facilité bancaire a eté consenti ou de sa caution, sans qu’il soit nécessaire de procéder à l’inscription de ce privilège.

³ 2152. Les créances privilégiées sur la généralité des immeubles sont—
1° les rémunérations de toute nature dues aux salariés et aux apprentis pour les cent-vingt derniers jours de travail, y compris les indemnités de licenciement et de congés payés, déduction faite des acomptes déjà perçus;
2° les frais de justice;
3° sous réserve des dispositions de l’article 2149, les créances de l’Etat, du Trésor Public, du fisc, de l’administration des douanes et des collectivités publiques ou des institutions publiques à raison—
– des impôts, contributions, droits ou taxes, de toute nature, tant directs qu’indirects;
– des prélèvements ou cotisations de sécurité sociale dus en application du National Pensions Act;
– des amendes pénales, et des frais de recouvrement de celles-ci; 4° les rémunerations de toute nature dues aux salariés et aux apprentis pour les six derniers mois de travail, déduction faite des acomptes déjà reçus et des sommes perçues en application des dispositions du 1° ci-dessus.

⁴ 2150-1. Toute banque établie conformément aux dispositions du Banking Act dispose, à la suite d’un prêt, d’une avance, ou autre facilité bancaire, d’un privilège spécial sur la ou les sommes qui figurent au crédit de tous comptes qu’elle tient au nom du client à, qui ce prêt, cette avance ou autre facilité bancaire a eté consenti ou de sa caution, sans qu’il soit nécessaire de procéder à l’inscription de ce privilège.

2150-2. Le privilège spécial de la banque ne garantit que la ou les créances resultant d’un prêt, d’une avance ou autre facilité bancaire consenti par écrit ou en vertu d’un écrit.

2150-3. Nonobstant toutes dispositions contraires, le privilège spécial de la banque s’exerce par préférence à tous autres créanciers du client ou de sa caution.

2150-4. Sous réserve d’une renonciation écrite de la banque bénéficiaire, le privilege spécial conserve ses effets jusqu’au complet paiement de la somme due par le client ou sa caution, ainsi que des intérêts, commissions ou frais en découlant.

2150-5. La banque aura le droit de procéder à la compensation entre la créance garantie par son privilège spécial, lorsqu’elle est exigible, et la ou les sommes figurant au crédit du ou des comptes qu’elle tient au nom du client ou de sa caution.

Une telle compensation aura les mêmes effets que la compensation légale instituée par l’article 1290 du présent Code.

2150-6. Le privilège spécial de la banque prend effet à dater de l’exécution du titre attestant le prêt, l’avance ou autre facilité bancaire consenti. Il est opposable aux tiers à partir de cette date.