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Understanding The Concept of Secured Credit Transactions and Secured Transactions On Moveable Assets (Collateral Registry) ACT 2017
Understanding The Concept of Secured Credit Transactions and Secured Transactions On Moveable Assets (Collateral Registry) ACT 2017
OF SECURED CREDIT
TRANSACTIONS AND SECURED
TRANSACTIONS ON MOVEABLE
ASSETS (COLLATERAL REGISTRY)
ACT 2017
Manifield Solicitors
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UNDERSTANDING SECURED CREDIT TRANSACTIONS
WITH EMPHASIS ON THE SECURED TRANSACTIONS ON
MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017
Manifield Solicitors
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.
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UNDERSTANDING SECURED CREDIT TRANSACTIONS
WITH EMPHASIS ON THE SECURED TRANSACTIONS ON
MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017
Manifield Solicitors
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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UNDERSTANDING SECURED CREDIT TRANSACTIONS
WITH EMPHASIS ON THE SECURED TRANSACTIONS ON
MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017
Manifield Solicitors
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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UNDERSTANDING SECURED CREDIT TRANSACTIONS
WITH EMPHASIS ON THE SECURED TRANSACTIONS ON
MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017
Manifield Solicitors
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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UNDERSTANDING SECURED CREDIT TRANSACTIONS
WITH EMPHASIS ON THE SECURED TRANSACTIONS ON
MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017
Manifield Solicitors
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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UNDERSTANDING SECURED CREDIT TRANSACTIONS
WITH EMPHASIS ON THE SECURED TRANSACTIONS ON
MOVEABLE ASSETS (COLLATERAL REGISTRY) ACT 2017
Manifield Solicitors
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.
CONCLUSION
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