Recognition and Enforceability of Close-out Netting and Set-off Provisions under Mauritian Law

INTRODUCTION – THE LEGISLATIVE FRAMEWORK IN MAURITIUS
The Mauritian Parliament undertook an overhaul of the insolvency regime in 2009 by passing the Insolvency Act No. 3 of 2009 (the “Insolvency Act”). The model upon which the netting arrangements have been enacted under the Insolvency Act is based on the 2006 Model Netting Act by the International Swaps and Derivatives Association.

In order to give certainty as to which law would apply to transactions involving those intermediary-held securities which are also being used as collateral or guarantees in the derivative markets, the Mauritian Parliament has adopted the Hague Convention on the law applicable to certain rights in respect of securities held with an intermediary (the PRIMA approach has been adopted).

QUALIFIED FINANCIAL CONTRACTS

The Insolvency Act creates a very flexible and business-friendly framework for Mauritius-incorporated counterparties wishing to enter into netting and collateral arrangements. Provisions relating to netting arrangements in qualified financial contracts are set out in Part V of the Insolvency Act which captures a very wide array of financial contracts, including, without limitation, swaps, futures, options, derivatives, securities contracts including a margin loan and an agreement to buy, sell, borrow or lend securities, collateral arrangements, commodities contracts, among others.

Further the Insolvency Act expressly provides that a qualified financial contract shall not be void or unenforceable by reason of being a contract of wager or gambling. This provision removes any prior doubt regarding the enforceability of netting arrangements in relation to wager contracts. This stems from earlier controversies arising in civil jurisdictions such as Mauritius in relation to agreements of a highly speculative nature, which agreements could be construed as contracts for gambling or wager, and therefore, unenforceable.

MUTUALITY IN DEALINGS: THE QUALIFIED FINANCIAL CONTRACTS EXCEPTION

Section 309 of the Insolvency Act provides that for set-off provisions to be effective in a contract, there has to be mutuality of dealings between the parties to such contract. However, Section 343 of the Insolvency Act allows for an express derogation from Section 309 relating to mutual credits and set-offs for netting agreements in qualified financial contracts.

In effect, Section 343 makes it clear that the provisions of a netting agreement for the determination of a net balance of the close-out values, market values, liquidation values or replacement values calculated in respect of accelerated and/or terminated payment or delivery obligations or entitlements under one or more qualified financial contracts will not be affected by the provisions of Section 309 limiting the exercise of rights to set off, offset or net out obligations, payment amounts or termination values owed between an insolvent party and another party.

Section 343 of the Insolvency Act therefore expressly overrides statutory set off as provided for in Section 309 and recognises contractual set off in netting agreements.