UNDERSTANDING THE CONCEPT

OF SECURED CREDIT
TRANSACTIONS AND SECURED
TRANSACTIONS ON MOVEABLE
ASSETS (COLLATERAL REGISTRY)
ACT 2017
Manifield Solicitors

INTRODUCTION unsecured credit. If the lender were sure that the

borrower would honour his indebtedness when
A Secured Credit transaction is a transaction in due, there would have been no need for security
which a lender (otherwise called creditor) since there is always a promise to repay in all
acquires a security interest in collateral owned credit transactions. Experience has taught most
by the borrower (otherwise called debtor) and is lenders that the borrower who promised in
entitled to foreclose on or repossess the earnest to repay on the due date may turn out to
collateral in the event of the borrower's default be very hostile and uncompromising when called
in repayment or any other clause in the security upon to fulfil his financial obligations to the
agreement. The terms of the relationship are lender. As a result, the lender in most cases will
governed by a contract, or security agreement. refuse to accept the empty promise of the
borrower, but would rather insist that certain
NEED FOR SECURITY property or additional third party assurance be
Commerce and Investment are the lifeblood of made available to secure the debt, so that when
any economy. Financing these major economic the borrower reneges, the lender can have
activities require the use of credit facilities by something to fall back on.
individual entrepreneurs, corporate entities, Security is indeed an assurance provided by the
small and large scale industries and multi- debtor in addition to the personal promise to
nationals, many of whom source capital largely discharge an obligation owed the creditor.
from borrowing. Banks and other Financial
Institutions provide the tonic for the vigorous CLASSIFICATION OF SECURITY
commercial activities through lending. The
provision of credit facilities is an investment for Security can be characterized based on a rigid
banking and a method of financial undertaking distinction between what is known as Personal
which propels economic growth. Security and Real Security with both having a
common feature of a separate and distinct
Basically, a lender has two options in providing assurance provided by the debtor in addition to
credit facility. Reliance may be placed on the the personal promise to discharge an obligation.
borrower‟s covenant to repay, having been
satisfied of the viable purpose for which the Personal Security gives the creditor a
credit facility is required, and the certainty of the secondary contractual action against the surety
source of repayment. It has been said that the in the advent of default by the debtor. It entails
most important factor to be taken into either a general contract of undertaking to be
consideration when assessing the safety of an liable for the debt or default of another, or a
advance is the borrower‟s capacity to repay the promise to be liable only upon the inability of
loan in accordance with his promise. But going the principal debtor or insufficiency of his assets
by this proposition, the debtor can default and to meet his obligations. The former is regarded
the creditor may discover that his interest is as indemnity contracts while the latter is
postponed to that of a secured creditor where the contracts of guarantee. Thus, personal security
debtor‟s assets have been given to secure merely involves a means of proffering some
another loan. In the event of the debtor‟s degree of assurance of repayment to the
bankruptcy, or insolvency, repayment of the loan creditor.1
depends on availability or sufficiency of debtor‟s
assets, and the creditor may soon discover that Where there is a default on the part of the
he has no remedy. debtor, the creditor who advanced a loan or to
whom a debt is owed has the option of
The second option is for the lender to take, in instituting an action against the debtor‟s surety
addition to the debtor‟s covenant to repay, on the basis of a contract of indemnity to recover
tangible assets and/or personal assurance in the the loan, or to proceed against any real security
form of guarantee or indemnity as security for
the loan. This option is usually adopted by
1
most, if not all banks, and has been preferred Mrs. Oluwatoyin Sanni, Secured Credit in a Global
from the earlier times due to the Economy: Challenges and Prospects. Department of
disappointments and losses identified with Private and Property Law, Faculty of Law, University
of Lagos, Nigeria, 2013. Page 25.

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WITH EMPHASIS ON THE SECURED TRANSACTIONS ON
MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017

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given by the surety.2 Thus, personal security Appropriation security gives the creditor
merely provides the creditor with a secondary neither proprietary nor possessory right but a
action of debt against a third party. However, simple appropriation of specific property to the
unless the undertaking by the surety is backed up satisfaction of the debt owed to the creditor
by real security, personal security offers limited through judicial sale of the property.
protection to creditors.
TYPES OF REAL SECURITY
On the other hand, real security is created where
the creditor, to whom an obligation is owed, An understanding of the concept of real security
either by statute or contract, obtains, in addition would not be complete without considering the
to the personal promise of the debtor to four types of real security recognized by English
discharge the obligation, rights exercisable law and forms part of our laws. An attempt
against some property in which the debtor has an would be made to define the types of real
interest in for the purpose of enforcing the security which includes: Mortgage; Charge;
discharge of the debtor‟s obligation to the Lien; and Pledge without an in-depth discussion
creditor.3 of its application.

Real Security is a useful safeguard in secured MORTGAGE

credit transaction as it assures the creditor of the
certainty of repayment as opposed to a mere A mortgage involves the transfer of ownership
possibility of enforcing a claim by action of debt in an asset to a creditor (known as a mortgagee)
which becomes the order of the day in personal by way of security for borrowing on the
security. In the event of the debtor‟s bankruptcy condition that upon full discharge of the debtor‟s
or insolvency, the security places the secured obligation, the mortgaged assets would be
creditor in a good position because the assets transferred back to the debtor (known as a
over which the real security is held would be mortgagor).
withdrawn from the general body of creditors in CHARGE
order to satisfy the obligation owed to the
secured creditor.4 A charge involves an agreement between the
debtor and the creditor that certain assets be
FORMS OF REAL SECURITY appropriated to the settlement of a debt. There
Real security takes the form of a right in rem and are two forms of a charge, the fixed or floating
it can be classified into three methods: charge. While the former is attached to
Proprietary security; Possessory security and ascertained/ascertainable and definite/definable
Appropriation security. assets, the latter covers present and future assets
which would change in the ordinary course of
Proprietary security arises in instances where business to an extent that unless there is some
legal or equitable title in the debtor‟s property is future occurrence/action by or on behalf of the
conveyed to and held by the creditor until all his chargee, the chargor may continue to use the
claims is satisfied. This often arises in mortgage assets in the ordinary course of business.
transactions. Though the creditor obtains
proprietary rights in the subject matter of the LIEN
security and there are instances where he can The lien is a possessory security created by
assume possession, liability arises in equity for contract which confers a right to detain certain
the rents and profits collected as well as money property until money owed to the detainee has
which would have been realized if the creditor been paid off. In this instance, the creditor only
did not assume possession. has a right to withhold possession of the assets
Possessory security gives a right of retention to as a security for payment without any interest
the creditor based on the creditor‟s continued being transferred to or conferred on the creditor
possession and not on the conveyance of the to sell what is being held.
title. Typical examples of this form of security PLEDGE
are the English pledge and possessory lien which
depends only on the creditor‟s actual possession A pledge is a form of possessory security which
of the subject matter of security. merely requires the transfer possession of a
thing, with the intention that it should be held as
security. A pledge is created when a debtor
(„pledgor‟) transfer possession of goods owned
2 by him to the creditor („pledgee‟) with the
See Professor I.O Smith, Op. cit., Page 7
3
See Mrs. Oluwatoyin Sanni, Op. cit.
intention of using the goods as security for the
4
See Professor I.O Smith SAN, Op. cit., Page 3 sum owed. A crucial requirement for the

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creation of a pledge is the transfer of possession regulated by Statute, so that one which
of the goods. This is done through actual lacks power to take or give security
physical delivery, or notional or constructive under the relevant statute will be acting
delivery, for example by delivering documents ultra vires its powers if it enters into
of title to goods to the creditor. such transaction. As regards registered
companies, although the Company and
SECURITY: PRELIMINARY INQUIRIES Allied Matters Act 2004 (Nigeria)
AND LEGAL REQUIREMENTS prohibits a company from carrying on
any business not authorized by its
The most popular method of making real memorandum or exceeding the powers
security available for credit facility involves a conferred upon it by its Memorandum or
true agreement between parties of full capacity the Act, the Statute protects any act,
in law, the existence, availability and viability of conveyance or transfer of property from
the subject matter of security. Therefore, if being invalidated and ipso facto,
creditors want to make the security viable and protects the secured creditor.
realizable, the following factors should be taken
into consideration: c. Validity of Agreement – a valid
secured credit transaction is that which
a. Recognition of parties in law – an is entered into by parties to a credit
agreement cannot have the force of law arrangement freely, while manifesting
or be enforceable between the parties to their genuine intention in writing. It is
it, except the parties are juristic persons. essential that the agreement reduced into
b. Capacity of parties – in the case of writing must not have been vitiated by
infants, the law is that all contracts, mistake, misrepresentation, duress or
whether by specialty or by simple undue influence. The credit arrangement
agreement entered into by infants for the for which security is obtained must be
repayment of money lent or to be lent meant only for a lawful purpose.
shall be absolutely void. Since a contract Otherwise, the security becomes
of loan made to an infant is void, a unenforceable.
guarantee of the loan is also void. In addition to the requirement of due
A person of unsound mind under the law execution, parties must ensure that other
may enter into a secured credit requirements of the law which include
transaction during his lucid interval formalities like consent of the
provided that a Receiver has not been appropriate authority, stamping and
appointed for him. A mortgage given for registration (where necessary) are
loan taken by a person of unsound mind validly met.
is valid unless it can be shown that the d. Reliability of security – a viable
lender (mortgagee) was aware of the security is one which the creditor could
insanity, in which case, it is voidable enforce in the event of failure or
and may be avoided by him. inability of the debtor to pay and realize
there from proceeds which liquidate the
Where the borrower is an illiterate, the indebtedness. It is therefore necessary
lender is required by law to show that not only that title over the subject matter
the former understood the purport of the of the security be secured, but also that
agreement, and that the property was the value of the same must be
meant as security for the loan given to commensurate to the indebtedness. In
him. It is therefore, usual in practice to this case, there are two key issues that
insert the illiterate jurat as a way of must be addressed; which are –
conforming with the Illiterates i. Assurance of title – a borrower cannot
Protection Law to the extent that the give as security property which does not
illiterate understood the transaction. belong to him. The rule is nemo dat
quod non habet, and a lender who takes
A trustee has no right to borrow money as security property which does not
on the security of the trust property, belong to the borrower may discover too
unless such power is reserved for the soon that there is no security enforceable
trustee in the Trust Instrument or by in law
some Statute. ii. Investigation of title to land - where
the subject matter of security is land, the
The capacity of a statutory corporation rule nemo dat quod non habet still
to enter into contractual relations, applies rigidly, making investigation of
including secured credit transactions is title imminent. In Nigeria, the source of

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MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017

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the borrower‟s title to land given as the debt and the value of the property in
security for credit facility may lie in favour of the lender.
customary land tenure, valid transfer or Where the lender relies on the careless
grant. If it is a family or communal land, representation of the Borrower‟s Valuer
the lender should know that it is as to the value of the property which the
inalienable for any reason whatsoever Valuer knew would be shown to the
without the consent of the accredited lender, and the latter suffers financial
representatives such as the Head of the loss as a result, an action lies in damages
family and Principal members in the against the Valuer for breach of a duty
case of a family property and the Head of care. If the interest in the property is
Chief or Oba in the case of communal leasehold, it is necessary to ascertain the
land. ground rent, consider the state of repair
Where the land is subject to a customary right as well as the general character of the
e.g customary tenancy or pledge, any security neighbourhood.
created on it is subject to that customary right.
No individual member of a family can alienate THE SECURED TRANSACTIONS IN
the family land as own, not even the head of the MOVABLE ASSETS (COLLATERAL
family. Where the borrower‟s title before REGISTRY) ACT 2017
lending was voidable, a subsequent transfer of
the land as security is void and of no effect; and Sometime in May of 2017 the presidency
this is so, notwithstanding the concurrence of the assented to the Bill on Secured Transactions in
family. Movable Assets (Collateral Registry Act).
Although the Central Bank of Nigeria (CBN)
Where a power of attorney exists on family had previously issued guidelines on the
property, the content of the instrument must be establishment of the collateral registry, hitherto,
properly construed to know whether the donee there had not been any legislation on the subject.
of the power is entitled to create security over This Act codifies CBN‟s earlier guidelines, and
the property in question. Since the type of Power retains the same Registry. The Act aims to
of Attorney contemplated here is one that is provide for the registration and regulation of
registerable, an unregistered Power of Attorney security interests in movable assets, by
must be discountenanced. In the case of a enhancing financial inclusion in Nigeria,
limited liability company as borrower, searches stimulating responsible lending to MSMEs and
must be carried out at the Corporate Affairs facilitating access to credit secured with
Commission to ascertain whether there is any movable assets.
encumbrance on the property to be offered as
security. OBJECTIVES OF THE ACT

e. Issue of Acquisition – where land is Most MSMEs hardly make it through their first
given as security, it is necessary that the 5 years of existence because of insufficient
borrower verifies the issue of acquisition capital. Funds are necessary for the smooth
and /or compensation since the efficacy running of any business. MSMEs are unable to
of the security depends on the access loans from banks because of the stringent
preservation of the subject matter of the collateral policies and the commercial banks
security for the lender to fall back on in preference for land as collateral. Usually, such
the event of default. land or landed property must have a certificate
f. Compliance with Planning of Occupancy and the Consent of the Governor
Regulations - a mortgage of structure of the State where the land is situated must first
on land requires investigation as to be obtained. These stringent requirements hinder
compliance with the relevant Town MSMEs access to credit. The Collateral Registry
Planning Regulations. The Mortgagee Act is innovative in resolving such funding
must ensure that all buildings on the problems as account receivables (the right to
land and extension thereto and any user receive value arising from an obligation owed by
of the land which is going on are all an account debtor to the borrower including
effectively covered by Planning book debts, but excluding negotiable
Permission. instruments) can be collaterised.
g. Valuation – the current value of the Arguably, the passage into law of the Secured
subject matter of security must be Transactions in Movable Assets Act, 2017 (“the
ascertained by a competent Valuer so as Act”), is the most significant reform undertaken
to ensure that the loan advanced by the by the Federal Government of Nigerian in a bid
lender leaves an ample margin between to expand access to credit facility for businesses
particularly, Micro, Small and Medium

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MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017

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Enterprises (“MSMEs”). Generally, the Act of each statute as the Bills of Sale Law applies to
provides a broad framework governing the “personal chattels” as opposed to “movable
creation of security interests in moveable assets, assets” under the Act.
the rights and obligations of parties to registered
security agreements, mechanisms for perfecting Personal Chattels are defined to include any
security interests in moveable assets, the goods, furniture and other articles capable of
creation of a national collateral registry and the complete transfer by delivery, and (when
determination of priority of competing interests separately assigned or charged) fixtures and
in secured assets. Briefly stated, the Act growing crops. The definition however generally
provides legislative imprimatur to the past excludes chattel interests assigned as part of a
efforts of the Central Bank of Nigeria (“CBN”) real estate security bucket, shares and stocks
to enhance such enterprises‟ access to debt (including government securities), choses in
finance. action, and farm produce subject to certain
restrictive covenants or customs.
SCOPE OF APPLICATION
By contrast, Section 63 of the Act simply
The Act applies to all security interests in defines Movable Assets as “tangible or
movable assets created by an agreement that intangible property other than real property”.
secures the repayment of money or the Goods include tangible movable as well as farm
performance of an obligation and applies to all products, inventory, equipment, and consumer
financing and operating leases entered into after goods. Consequently, it can be inferred that the
commencement of the Act. However, the Act Act is wider in scope and covers all forms of
does not apply to: assets capable of being moved or transferred by
delivery.
a. any right of set-off;
b. the creation or transfer of an interest in A security interest under the Act is created by a
land other than account receivables; and security agreement (i.e., loan agreement)
c. any interest created by a transfer, between a borrower and a creditor, the loan
assignment or mortgage in movable agreement must reflect the intention of both
property governed by a law for which a parties to create a security interest, identify the
registry has been established with parties, describe the total loan sum, describe the
regards to ships and aircraft. collateral and the duration of the loan.

Security transactions consummated prior to the The collateral must be adequately described, in
commencement of this Act are only valid for terms of item, kind, type or category, year of
180 days after the commencement of the Act manufacture or any other description that can
without registration. There is no penalty identify the collateral or a statement that the
prescribed for non - registration in the Act. The security interest covers present and future assets
transaction is however, only deemed as of the borrower. The security interest also
perfected upon registration and constitutes extends to identifiable or traceable proceeds of
notice to third parties and priority is granted the collateral, notwithstanding that the
upon registration. agreement does not include that clause. This is
essentially an expression of the principle of
Worthy of note is that the Act shares a number „after – acquired property‟ at common law. The
of similarities with the Bills of Sale Law which security would cover identifiable proceeds and
affords protection to creditors who have been goods that have been co-mingled. Perfection
granted security interests in movable property occurs when a financing statement has been
and personal chattels by way of a bill of sale. registered at the collateral Registry, but
Like the Act, the Bills of Sale Law creates a possession alone does not perfect the security
principal registry and establishes a procedure for interest. The Act retains the establishment of a
the registration, renewal and security of bills of National Collateral Registry in the Central
sale. Bank of Nigeria (CBN) and interests already
registered at the Registry remain valid.
However, unlike the Act the Bills of Sale Law
expressly excludes debentures issued by a The registration of the financing statement will
company and secured by its capital stock, goods include a unique registration, number, date and
or chattels – in respect of which the Companies time assigned to it by the Collateral Registry.
and Allied Matters Act (CAMA) would The financing statement will include a
generally apply. description of the parties, collateral and the
tenure of the loan.
The key distinction, therefore, between both A confirmation statement will be issued by the
statutes seems to be in the scope of application Registry to the creditor who files the financing

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statement, and the executed loan agreement b. provide access to persons who may
serves as consent of the borrower. seek information on security interests
from the collateral registry
The registration will be ineffective if there is an
error in the unique identification number of the Security interests in movable assets may be
borrower or if the serial number of the collateral perfected by registering a financing statement in
cannot be retrieved. respect of that security interest at the collateral
registry. Proceeds of collateral which are
A search can be conducted at the registry using specifically described in the financing statement
the unique biometric-based identity of the or, are in the form of money, accounts
borrower or the serial number of the collateral. receivables, negotiable instruments or bank
Priority of security interest is according to the accounts, are automatically perfected and no
order of registration; however, a financial further action is required. With respect to the
institution‟s right of set-off shall have priority timing and obligation of registration, the Act
over a perfected security that extends to a provides that a financing statement may be
deposit account. This provision is an incentive to registered by or on behalf of a creditor at any
financial institutions as they are assured of time. This suggests that the collateral may be
priority in the realization of their security. registered at any time.
The creditor can notify the borrower of his PRIORITY OF REGISTERED INTERESTS
intention to realize the security by hand, courier
service, electronic mail or registered mail. Importantly, priority amongst perfected security
interests in the same collateral is to be
The realization of the security interests can be determined on the basis of the order of
achieved by resorting to judicial remedy or registration. The immediate implication of this is
without a court order, if the borrower consented that a security interest which is earlier in time
to relinquishing possession without a court order may be defeated by a later interest provided that
in the security agreement. In our view, this the latter interest is registered first. Thus, while
exclusion does not bar the borrower from there is no stipulated timeframe for registration
seeking judicial remedy if the transaction is under the Act, the potential loss of priority
marred with fraud. should provide a strong incentive to lenders to
ensure that their interests in the collateral are
The prudent thing for a savvy creditor to do is to
duly registered as soon as possible after the
include the clause relinquishing possession creation of such interest. Relevantly, a security
without the court order in the loan agreement. interest is to have the same priority in respect of
This will prevent needless litigation. The all secured obligations and advances, whether
creditor may request for assistance from the existing or future, and a prior interest shall
Nigerian Police having jurisdiction where the attach to both the collateral itself and any
collateral is located upon presentation of the proceeds of disposal thereof.
security agreement and duly certified
confirmation statement. It is an offence to ENFORCEMENT OF SECURITY
knowingly provide false or misleading INTERESTS
information to the Registry, and upon
conviction, the offender is liable to With respect to the enforcement or realisation of
imprisonment for 1 year or a fine of N100, a registered security interest, Section 39(1)
000.00 or both. It is also an offence for the provides that in the case of default, a secured
borrower of a registered asset to dispose of the creditor may, inter alia,
asset to a third party without disclosing the fact
of the encumbrance.5 a. exercise all its rights under the Act and
in the security agreement; or
THE COLLATERAL REGISTRY
b. resort to any appropriate judicial
The Act also establishes a collateral registry and remedy.
stipulates that the registry is to essentially:
The remedies provided in the Act are expressly
a. receive, register and store information stipulated to be in addition to any other remedy
about security interests in movable provided in the Companies and Allied Matters
assets and Act. However, where a creditor has suffered a
default and intends to enforce its security, it
must provide the borrower and the grantor with a
notice of default and, thereafter, must wait 10
(ten) days before exercising its right to enter into
5
Section 58(1)(a), & (2) of the Act.

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possession of the collateral or render same codification of the rights and obligations of
inoperative (in appropriate circumstances). parties is a welcome and long awaited
development.
The Act also recognises the common law
banker‟s right of set-off and provides expressly
that it shall have priority over a perfected
security interest in respect of a deposit account
held with a bank. In effect, account security will
remain significantly easier to enforce than
security over other moveable assets.

Generally, it seems that the intention of the

legislature here is to significantly limit the role
of the courts in the enforcement of security in
moveable assets. For one, a creditor may
exercise its right to repossess collateral without
commencing any judicial process where such
right is expressly set forth in the security
agreement.

Also, secured creditors under the Act are entitled

to the assistance of the police in order to ensure
the peaceable repossession of collateral. This is a
significant development in the enforcement of
security interest (especially as the Act seems to
suggest that such police assistance need not be
pursuant to a court order) and only time will tell
whether this is a positive development which is
used properly and with restraint, enhances the
value of security and, therefore, serves as a boon
to economic activity or, alternatively, is abused
and results in a form of civil vigilantism or
legalised „jungle justice‟.

The Act also establishes a “Mediation and

Dispute Resolution Panel” which is stated to be
the first resource for the mediation and
settlement of any dispute which may arise
between a creditor and grantor in relation to
enforcement of a registered security. It is not, as
yet, clear what shape this panel will take or how
the courts will view its role in the resolution of
disputes, particularly in the face of the inevitable
arguments as to jurisdiction, for example, to
determine whether prior recourse to the panel is
a required condition precedent to an action in
court.

CONCLUSION

The Act improves secured credit transactions

and financing for the MSMEs. This is because
their inventory, equipment and other movable
assets can be collaterised to assure them of
access to credit to expand their business and also
for the smooth running of the business. The Act
has set out to achieve one of the objectives set
out in the National Policy on MSMEs which is
to broaden the scope of acceptable collateral for
MSME lending. The focus had been too long on
land as a secured asset, and the statutory
establishment of the collateral registry, and

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