Secured Transaction Reforms – Unlocking SME Finance for Growth
The rationale for developing a modern legal framework for security rights in movable assets is to enhance access to finance at a lower cost, and foster development and economic growth.
To this end, the Government continues to spare no efforts in complying with international best practices and benchmarks, in particular on the World Bank Doing Business Strength of Legal Rights index, which examines the quality of a country’s secured transactions law on movable property from the perspective of small, and medium-size enterprises (‘SMEs’). In fact, business facilitation reforms were announced in the 2017-2018 Budget, focusing on the recognition of movable assets as collateral. This has been further complemented with the recent enactment of the Code de Commerce (Amendment) Act 2018, which now provides for the recognition of legal concepts such as ‘fonds de commerce’ and ‘garanties autonomes’.
These legal amendments constitute yet another milestone in the Government’s initiatives to ease access to finance and secure legal relationships, in line with the World Bank recommendations on Secured Transaction Reforms. While SMEs traditionally have access to finance through banks and non-banking financial institutions, those financing institutions require fixed assets and land/buildings as collateral. In fact, most SMEs lack access to alternative financing mechanisms to fund their capital needs inasmuch as the majority of their assets are in the form of movable property. To this end, the amendments now extend the scope of the secured transactions legal regime by allowing the use of the value of a commercial business as a whole, including leasehold rights, trade name, intellectual property rights and goodwill but excluding the value of freehold property as collateral.
With these reforms, Mauritian traders will be able to adapt their commercial exploitation to the evolution of the market and diversify their business lines accordingly. For example, a retailer which operates a hardware business may freely choose to sell home appliances. This model will open avenues for tapping into diverse commercial opportunities and expanding the distribution channels across both import and export trade.
Another concept, and one which has been highly influential in developed economies is based on ‘garanties autonomes’. This security interest is likely to bring more certainty and security in legal relationships between financial institutions and traders. For instance, this financial commitment will be particularly helpful where a financial institution undertaking to extend, to a beneficiary a payment of an amount up to a sum agreed, will not be able to postpone this payment or raise a dispute for any reason whatsoever. This amendment will therefore bring added flexibility both in the choice of security interests available and in the manner in which they are enforced.
As announced in the 2018-2019 Budget, the Government has taken a step further in introducing an electronic registry of movable collateral (‘registry’). The registry which will be established at the Registrar-General’s Department seeks to further enhance the ease of doing business. Accordingly, amendments have been brought to the Code Civil Mauricien to give effect to the budget measure.
The registry will facilitate access to information in real time thereby providing lending institutions with transparency and ability to assess, manage and mitigate their risks of extending credit over movable property. This initiative will ultimately contribute towards reducing transaction processing costs and cost of borrowing by the debtor.
Going forward, these measures will help to increase the availability of credit and reduce its cost, by ensuring that lenders can collect debt and enforce their rights in movable property collateral through a timely and inexpensive process.