The unravelling situation with the COVID-19 pandemic has caused significant financial turmoil in Mauritius. A likely effect of these disturbances could result in companies going for winding-up and other alternatives available under Mauritian law.
During the midst of this economic downturn, if a company takes stock of its situation, seeks appropriate legal advice and takes the requisite measures to minimise its losses in a timely manner, the company will have greater chances of surviving.
Through this alert, our team would like to shed some light on ways of business rescue and survival, focusing on the concept of voluntary administration and also look into the duties of a director of a company in the present context.
1. What is voluntary administration and how does it work?
This particular issue has made recent headlines with the announcement of Air Mauritius’ voluntary administration, as stated by a communiqué signed on 22 April 2020 by the company’s board of directors. The notice stated that the board of directors took the decision to place Air Mauritius under voluntary administration in order to safeguard the interests of the company and that of all its stakeholders.
The concept and aim of voluntary administration is very much different from that of liquidation. The Insolvency Act 2009 introduced voluntary administration as a new form of insolvency procedure alongside the traditional ones of liquidation and receivership. Administration procedure is designed to hold a business together while plans are formed to put in place a financial restructuring to rescue the company. Administration offers an opportunity for a company to continue its trading activities which will have to be managed by a licensed insolvency practitioner for the benefit of that company’s creditors.
Regardless of the party/ies who may appoint an administrator, his fiduciary duty will be to act in the interests of all creditors. By taking control of the business affairs, the administrator is required to investigate the company’s affairs to salvage the business in the interest of the stakeholders. The administrator would need to form an opinion and inform the creditors as to whether it would be in their interest to:
- execute a Deed of Company Arrangement (DoCA) and achieve a better outcome for the creditors of the company than would otherwise be achieved if the company was put directly into liquidation;
- end the administration; or
- appoint a liquidator.
The first creditor meeting (10 days after administration begins) is set up to help the creditors of the company to constitute a committee that will consult with the administrator about matters relating to the administration and to receive reports. Within the convening period, that is, 28 days after his appointment, the administrator must circulate a statement to the company’s creditors setting out his proposals for achieving the purpose of the administration and such notification has to be advertised in a daily newspaper. The “watershed meeting” then needs to be held within 7 days of the end of the convening period.
During the process of administration, a statutory moratorium is put in place against individual creditors. It is also interesting to note that a person cannot enforce a charge over the property of a company which is under administration except with the administrator’s written consent or with the permission of the Supreme Court in Mauritius. The purpose of this moratorium is to maximize the chances of achieving business rescue which is very different from the purpose of liquidation.
The administration of the company ends when one of the events detailed below arises:
- A compromise is reached (within the convening period between the creditors and the company), the terms of which will be reflected in a DoCA.
- The purpose of the administration has been sufficiently achieved.
- The administrator is of the opinion that the purpose of the administration cannot be achieved;
- Creditors (with claims not less than 10% of the total value of all creditors’ claims) resolve that the administration should end, and may appoint a liquidator where the notice of the meeting sets out a proposed resolution in this regard.
- The Court terminates a DoCA on the application of one of these parties: the creditor, the company, the deed administrator and any other interested persons.
2. Impact of COVID-19 on the financial condition and potential insolvency of a company
Many companies are likely to experience a decline in their financial condition as a result of COVID-19, perhaps as a result of cash flow issues, falling revenue or deterioration in asset values. This could result in companies becoming unable to meet their scheduled loan repayments or in breach of financial covenants in loan agreements or other contracts. It is imperative that directors closely monitor these matters and engage with lenders and other counterparties as required, in a timely manner.
This task will be made more difficult given the rapidly evolving nature of the COVID-19 crisis. In Mauritius, when the company becomes insolvent, directors can face personal liabilities if they had knowingly allowed the companies to trade whilst being insolvent. Hence, it is important that directors seek professional advice as soon as there is any concern regarding the solvency of the company.
With the uncertainties of the economic climate due to the COVID-19, a director should take in consideration that although a business is managing to stay afloat at the moment, a decline in demand in the forthcoming months can still lead the company towards insolvency. As a prudent initiative, a director can opt for voluntary administration, even when the company is still solvent. A company with reasonable predictable profitability and cash-flows will benefit from an administration as opposed to an insolvent company with few assets, limited prospects and poor cash-flow.
3. What are the statutory duties of directors, especially when the company is experiencing financial difficulty?
In Mauritius, the Companies Act 2001 requires directors of companies, among their other duties, to act in good faith and in the best interests of the company.
Directors should be mindful of the interests of stakeholders (i.e. employees, customers, suppliers and local communities) when deciding how best to direct the actions of their company and the need to balance carefully the short-term needs of the company against the long-term impact of their decisions.
When the director of a company believes that the company is unable to pay its debts as they fall due, the law imposes a duty on the director to call a meeting of the board to consider the best means of business rescue. Hence, where a meeting is called under the Companies Act 2001, the board of directors should consider whether to appoint a liquidator or an administrator, or to carry on the business of the company.
In view of the uncertainties surrounding the COVID-19 pandemic, especially in relation to its duration, it may be difficult for directors to ascertain how their immediate actions may impact on the long-term success of the company and/or its various stakeholders. If directors, however, act in good faith and in a prudent manner based on the information at hand at the time of making each decision, this can mitigate this risk. Useful tips and measures would include the directors recording the decisions being taken and the key information and factors that the directors took into account when making such decisions. Directors could also document any alternative options that the board considered in taking those decisions and the reasons why particular options were preferred.
4. What are the liabilities that a company could be facing?
Failure to adequately react to the COVID-19 pandemic situation or to effectively implement contingency plans could lead to directors being exposed to several types of claims.
Upon the application of an appointed liquidator or of a creditor of a company which has continued to trade although being insolvent, the court has power to make an order that the director should be held liable for the whole or part of any loss suffered by creditors of a company.
The Mauritius Revenue Authority also has the power to impose certain penalties and may even apply for an attachment order on the assets of a company.