The priority of creditors paid out of the proceeds of the sale of the assets of a company in receivership was recently addressed in the judgment of Heeralall N. v The Director-General, The Mauritius Revenue Authority 2024 SCJ 56. In this case, the order of priority was decided between the Mauritius Revenue Authority, as a tax-collecting parastatal organisation, and a financing institution as a secured creditor, The Mauritius Commercial Bank.
The dispute arose when the Bank appointed the appellant as Receiver and Manager (Receiver) of Best Flour & Co Ltd (Company) due to significant defaults in payments. Subsequently, the MRA inscribed a privilege on the Company’s immovable properties for outstanding taxes. The appellant sought to erase this privilege to facilitate the sale of the properties, leading to a legal battle over the priority of creditors’ claims.
The facts
The company was in default of its obligations under a loan agreement with the Bank, secured by fixed and floating charges over its properties (Charge). Consequently, the Bank appointed the Receiver to enforce the Charge.
One month prior to the appointment of the Receiver, the MRA had inscribed a privilège over the said properties (Privilège) for outstanding tax payable by the Company.
The Receiver subsequently sought the Court’s directions under the Insolvency Act of 2009 (Insolvency Act) to determine the priority between the Charge registered and inscribed on 17 March 2016 and the Privilège inscribed on 12 October 2017.
The judgment
The Court of first instance determined that the MRA ranked before the Bank and was thus entitled to be paid all the outstanding tax.
The Bank appealed against this finding. The Appellate Court, in its judgment, interestingly, highlighted a void in the Insolvency Act.
Whilst in an insolvency scenario, s. 328 and the Fourth Schedule of the Insolvency Act cater for the priority of payment of preferential and secured creditors, in a receivership scenario, s. 204 (2) of the Insolvency Act, fails to set out such ranking. It states, ‘The persons entitled to payment out of the property of a company in receivership shall be in such rank of priority as may be prescribed.’
This section was amended by the Business Facilitation (Miscellaneous Provisions) Act of 2019 whereby the previous repealed section clearly set out the ranking of preferential claims. In relation to the new provision of s. 204 (2) however, the legislator has, to date, failed to make regulations. Therefore, there are presently no provisions to determine the ranking of preferential creditors of a company under receivership under the Insolvency Act.
In light of such vacuum, the Appellate Court was required to turn its attention to general principles of the Code Civil Mauricien (Civil Code).
The Civil Code, at articles 2148 and 2152, comprehensively sets out the order of priority of preferential creditors in respect of privilèges on moveables and immoveables respectively.
Relevant parts of article 2148 read as follows:
Les créances privilégiées sur la généralité des meubles sont les suivantes, et s’exercent dans l’ordre suivant:
- les rémunérations de toute nature dues aux salaries […];
- les frais de justice;
- 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; […]
Relevant parts of article 2152 read as follows:
Les créances privilégiées sur la généralité des immeubles sont:
- les rémunérations de toute nature dues aux salaries […] ;
- les frais de justice;
- 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; […]
Based on the above, the ranking of the MRA, as a creditor to whom tax is due, ranks third.
The aforementioned should be read in conjunction the article 2149 of the Civil Code, which limits the amount of tax which can be recouped to the MRA for a maximum period of 12 months.
Article 2149 states that:
Les créances de l’Etat, du Trésor Public, du fisc, de l’administration des douanes et des collectivités publiques, ou des institutions publiques, visées par les dispositions des articles 2148 et 2152, ne sont privilégiées qu’à concurrence du montant le plus élevé d’une seule année d’arriérés.
In terms of the Charge, its governing provisions in the Civil Code state that the date of inscription of the Charge is key in determining ranking of preferential creditors.
The relevant articles read as below:
2202-53 : Toute sûreté fixe ou flottante confère un droit de préférence dont le rang se détermine au jour de son inscription à la conservation des hypothèques.
2202-54 : Une sûreté fixe ou flottante primera tous privilèges, droits de preference, hypothèques ou autres sûretés qui ne prendrait effet à l’égard des tiers que postérieurement à son inscription.
There is however an exception to the above. The order of priority under the articles 2148 and 2152 takes precedence over a Charge, regardless of the date of inscription under article 2202-55 of the Civil Code, stating as follows:
[…] les privilèges énumérés aux articles 2148 et 2152 auront priorité sur toute sûreté fixe ou flottante, quelle que soit la date de son inscription.
Conclusion
Based on the above relevant parts of the Civil Code and, whilst re-iterating the vacuum in the Insolvency Act, the learned judges concluded that:
- the MRA would be able to recover tax payable by the Company up to a period of 12 months first;
- the Bank would in turn be entitled to be paid on the basis that the Charge was inscribed before the Privilège; and
- the MRA would thereafter be paid any remaining balance of tax due.
In this comprehensive ruling, the Supreme Court clarified the hierarchy of creditors’ claims in receivership cases, affirming the supremacy of the Civil Code provisions.
The judgment emphasised the need for legislative reform to enhance the legal framework governing receivership proceedings in Mauritius.
This landmark decision is expected to guide future receivership cases and provide clarity on the rights and obligations of creditors, receivers, and debtors under Mauritian law.
This judgement also brings to light the adage, often cited in legal discourse, that ‘Statute trumps the Civil Code’, may actually not find its application in all instances.
At the time of publication, it is not known whether this judgment is subject to further appeal.
--
Read the original publication at Bowmans
