MAURITIUS: CAPITALISATION OF INTEREST – PRACTICAL INSIGHTS
Interest due on the banking facilities granted to borrowers is generally capitalised. Capitalisation of interest (or anatocisme) provisions in loan agreements should be agreed upon carefully because borrowers may end up having to pay an amount significantly higher than the loan agreed upon.
There is no legal requirement governing interest charged by lenders in Mauritius. The result of this is that the interest charged by banks in the country is governed by contractual terms, being at the discretion of the parties, and is not payable unless it has been agreed in the terms of an agreement (contract). However, capitalisation of interest is strictly regulated and the relevant provisions are found under Article 1154 of the Mauritian Civil Code.
What is capitalisation of interest?
Capitalisation of interest comprises the addition of all unpaid interest that has accrued on the principal loan amount to the principal amount. This results in a new principal balance which is higher, and interest charges after capitalisation are calculated based on the new principal balance. Consequently, the cost of repaying the loan increases.
How does capitalisation of interest work in the banking industry?
In a typical financing transaction, the loan agreement negotiated and signed between the lender and the borrower generally provides that the borrower is required to pay accrued interest on that loan at the end of each interest period and that if the borrower fails to pay any amount due under the loan agreement, including interest on its due date, interest will accrue on the overdue amount.
Therefore, where the borrower fails to pay any interest due, accrued interest is capitalised on the loan under the terms of the loan agreement, and the burden of repayment increases.
Article 1154 of the Mauritian Civil Code therefore mitigates this by providing that unpaid interest can only be validly capitalised if that interest is due for at least one whole year.
One of the recurrent questions we face is whether the restrictions to capitalisation of interest, as provided under Article 1154, is of public order. The first section of Article 1154 is clear on this point: it is of public order.
Therefore, any clause included in a Mauritius law governed loan agreement contrary to the principle of capitalisation of interest as provided under Article 1154 of the Mauritian Civil Code may not be enforceable before the Mauritian courts and is likely to be declared null and void.
Parties to a loan agreement governed by Mauritian law are therefore advised to insert a clause providing that unpaid interest arising on an overdue amount will be capitalised with the overdue amount only if such interest is due for a period of at least one year. It is also advisable to specify that that it will remain immediately due and payable.
It is also important to highlight that Article 2202-6 of the Mauritian Civil Code provides for a lender to expressly reserve the right to capitalise interest by inserting a clause providing for it in a loan agreement granted by an approved institution (institution agréée) where the term of the facility exceeds three years, provided that, such clause does not contravene the principle of Article 1154 of the Mauritian Civil Code.
It is also worth noting that Article 2202-6 has been amended by The Finance (Miscellaneous Provisions) Act 2016 (Finance Act) so that it is made subject to the provisions of Article 1154 and not a derogation thereof, contrary to what was affirmed in the case of Inex Limited v The Development Bank of Mauritius [2016 SCJ 316].
This amendment has called for a review of the practice of capitalising interest by banking institutions in Mauritius.
When dealing with cross-border transactions it is important to determine whether a loan agreement governed by foreign law to which a Mauritian borrower is party and which contains a clause contrary to the principle of capitalisation of interest as provided under Article 1154, would be enforceable before Mauritian courts.
In such cases the enforcement of a judgment obtained in a foreign court granting to the repaying of compound interest may be problematic in Mauritian courts, in light of the provisions of Article 1154 being of public order. The likely outcome could be that no contractual derogation would be allowed and enforcement of such judgment may be refused.
The Mauritian Civil Code makes it clear that it is not possible to derogate from the laws of public order and morality by way of agreement. Hence, in cross border transactions, it is important to flag at the outset that, as a matter of Mauritius public policy, interest must be due for one whole year before it can be capitalised.
The amendment brought by the Finance Act in 2016 can be seen as a much-welcomed development in that it has cleared any doubts concerning the manner in which overdue interest should be capitalised.
Prior to the amendment, banks were relying heavily on the provisions of Article 2202-6 with regard to the capitalisation of interest and ignoring the provisions of Article1154 which are of public order.
The amendment has helped to provide clarification and increased awareness on the part of borrowers with respect to allowable practices by banking institutions in Mauritius.