SECURED TRANSACTIONS IN MOVABLE ASSETS: A REVIEW OF THE SECURED TRANSACTION REFORM LAWS IN NIGERIA:

1.0   INTRODUCTION

Micro, Small and Medium Scale Enterprises (MSMEs) have limited or no access to credit for their businesses. To get credit to grow their businesses they are  expected to use immovable property such as land as collateral. Immovable properties  might not have been available to them to use as security, thereby denying them the much needed credit to transact their respective businesses.

The importance of credit to economic growth cannot be overemphasized. It is also the driving force of private sector development. However, in Nigeria more than 70 percent of private enterprises, typically MSMEs, have limited or no access to credit. Credit applications get rejected due to insufficient credit history and information for the lender to use to make a reasonable judgment, as well as unacceptable collateral. There was clearly a lacuna that needed to be filled by the enactment of a new law.

In May 2017, two new Bills were signed into Law, The Collateral Registry Act of 2017 and The Credit Reporting Act 2017. The Collateral Registry Act 2017 was enacted to reform the Secured Transactions landscape in Nigeria which prior to now restricted collateral to Immovable Property.

Now with the enactment of these new laws, movable asset such as motor vehicles, equipment etc. can be used to access loans from credit bodies. The movable properties will have to be registered in the National Collateral Registry before it can be used as collateral for loans.

The Credit Reporting Act 2017, provides for credit information sharing between Credit Bureaus and lenders, such as Banks and also other services provided on credit such as telecommunication companies and retailers.

2.0    CONCEPT OF SECURITY IN SECURED TRANSACTIONS

Security simply put is a right given to one party in the assets of another in other to secure payment.[1] The concept of security therefore is in the nature of a security interest which is distinguished from other interests with the following characteristics.

  1. Origin– It should arise out of a transaction with the main intent of being a security. The parties must deliberately intend it as security.
  2. Nature of right created– It should not be a right in ‘personam’, rather it should be a right in ‘rem’.
  3. Mode of creation– It is created by grant or declaration of trust, and not by mere reservation.

One of the important motives for security in secured transactions is that it affords the lender access to assets which can be directly realized and the proceeds therefore applied to the indebtedness in the event of a default.

Another important motive for taking security in financing a project is the desire to control the destiny of the financed project, should things start going wrong.[2]

 

3.0    COMMON FORMS OF SECURED TRANSACTIONS

Secured transactions do come in various forms, but the most common forms are as follows-

  • Pledge– A pledge does not involve the transfer of a title, but it merely gives the creditor the right to possess the security. Two elements are involved, actual delivery or constructive delivery. For the creditor to be able to sell the property upon default, he must have the right to sell.[3]

 

  • Mortgage– This is the actual or constructive transfer of the ownership of an asset by way of security to another, upon condition that the asset will be re-transferred to the other upon the discharge of the obligation. Having an equity of redemption, a mortgage is indeed a true and time tested security. Its draw back however, lies in the cumbersome and time involving procedure for documentation and perfection.[4]
  • Charge– A charge is simply an agreement between a creditor and a debtor. In the agreement, the assets would be appropriated to the satisfaction of the debt. The creation of a charge does not need to be in a specific form. The parties must have an intention to create a security.[5]
  • Lien– A lien is a contractual right to detain property but does not confer right to sell. The bankers Lien is however different because it goes with a power of sale.[6]

 

 

4.0      SECURED TRANSACTIONS IN NIGERIA BEFORE THE COLLATERAL REGISTRY ACT 2017

Prior to the enactment of The Collateral Registry Act 2017 and the Central Bank of Nigeria‘Registration of Security Interests in Movable Property by Banks and Other Financial Institution in Nigeria Regulation No.1 2015’, secured transactions were mostly conducted by using immovable properties as collateral for loan. Anything short of that was not always acceptable especially by banks and other credit institutions.

Banks and other Financial Institutions only give loans to businesses that can provide fixed land and property as collateral. This move shuts out Micro, Small and Medium Enterprises (MSMEs) which usually owns mostly movable assets like motor vehicles and equipment. The downside of this arrangement is that many businesses with the potential to succeed maybe screened out and thus deprived access to financing.[7]

Since MSMEs account for the major share of the private sector and employment in Nigeria, it is quite unfortunate that despite the size and overall importance of these businesses, they rarely had access to credit from Financial Institutions except in situations where they have landed properties to be used as collateral. It is safe to say that the overall business climate was affected since MSMEs which plays a major role in any country’s economic development had a huge challenge before it.[8]

 

5.0 COLLATERAL REGISTRY ACT 2017

Modern Secured Transactions Laws and Collateral Registries are of vital importance to any country’s economic development. Collateral provides the basis for free-flowing credit markets, cutting the losses lenders might face from non-payment of loans. While land and buildings are widely accepted as collateral for loans, the use of movable collateral (such as inventory, accounts receivables, crops and equipment) is restricted because many countries do not have functioning laws and registries to govern secured transactions.[9]

With the enactment of Collateral Registry Act 2017 and The Credit Reporting Act 2017, Nigeria has joined the league of countries with reformed Secured Transactions Laws. Reforming the framework for movable collateral lending allows businesses and MSME’s to leverage their assets into capital for investment and growth. The creation of these Registries therefore increases the availability of credit and also reduces the cost of credit.

The major objective of the Act is to enhance financial inclusion in Nigeria;  stimulate responsible lending to MSMEs;  facilitate access to credit secured with movable assets;  facilitate perfection of Security Interests in movable assets;  facilitate realization of Security Interests in movable assets; and  establish a Collateral Registry and provide for its operations.[10]

The Act applies to all Security Interests in movable assets created by an agreement that secures payment or the performance of an obligation; a person who is a Creditor, Borrower or Grantor under this Act; and all financing and operating leases entered into after the commencement of this Act.[11]

Section 5 of the Act goes ahead to lay down the content of a security agreement and it states as follows-

S.5 A Security Agreement shall:

(a) Reflect the intention of the Grantor and Creditor to create a Security Interest;

(b) Identify the Grantor and Creditor;

(c) Describe the secured obligation including the maximum amount for which the Security Interest is enforceable;

(d) Describe the Collateral adequately; and

(e) Indicate the tenor of the obligation secured

The Act goes further to describes what an adequate collateral should contain which is the item, kind, type or category, year of manufacture or any other description that can identify the Collateral.[12]

  • THE ESTABLISHMENT OF THE NATIONAL COLLATERAL REGISTRY

 

  1. There is established in the Central Bank, a registry to be known as the National Collateral Registry (in this Act referred to as “the Collateral Registry”).
  2. The Governor of the Central Bank of Nigeria shall appoint the Registrar and such other staff as may be required for the attainment of the objectives of this Act.
  3. The Registrar shall supervise and administer the operations of the Collateral Registry.[13]

5.2   FUNCTION OF THE NATIONAL COLLATERAL REGISTRY

The National Collateral Registry is to perform the following functions

  1. Receive, register and store information about Security Interests in movable assets.
  2. Provide access to persons who may seek information on Security Interests from the Collateral Registry.
  3. Perform such other functions as may be prescribed by Regulations made under this Act.[14]

5.3   PROCEDURE FOR THE REGISTRATION OF A FINANCIAL STATEMENT

A Financing Statement may be registered by or on behalf of a creditor at any time with the consent of the grantor as required under the Act.[15]A Financing Statement is registered when a unique registration number, date and time are assigned to it by the Collateral Registry.[16]The Collateral Registry shall, after a Financing Statement has been registered, issue a Confirmation Statement to the Creditor who files for registration.[17]

Registration of an initial Financing Statement is ineffective unless the Grantor consented to it in writing.[18] A Security Agreement in accordance with Section 4 is sufficient to constitute consent by the Grantor for the registration of an initial or amendment Financing Statement covering the collateral described therein.[19]  The Grantor may give consent in writing to register a Financing Statement prior to the conclusion of a Security Agreement.[20]  Registration of an Amendment Financing Statement is ineffective unless consented to by the Grantor in writing if the Amendment Financing Statement adds a description of new Collateral; or adds a new Grantor unless the new Grantor is a transferee of the collateral already described in the registration.[21]

 

 

5.4    DESCRIPTION OF COLLATERAL

The Financing Statement must include a description of the Collateral that reasonably allows its identification.[22]  A description of Collateral is sufficient if the Collateral is described by: (a) item, kind, type or category; (b) a statement that a Security Interest is taken in all of the Grantor’s present and after-acquired property; or (c) any other description that reasonably identifies the collateral.[23]If a Financing Statement covers serial-numbered goods it must contain information of the serial number, in addition to the information as defined above.[24] (4) Serial-numbered goods that are held as inventory need not be described by a serial number. A description of serial-numbered goods held as inventory is sufficient if it satisfies the requirements of sub section 2.

5.5   SEARCH AT THE REGISTRY

A person may conduct search at the Registry for information provided in registered financing statement according to criteria set.[25]The following are the criteria-

  1. The unique-based identifier of the granter.
  2. The serial number of the collateral, or,
  3. Such other criterion as may be prescribed by Regulations.[26]

It should be noted that for search to be conducted, prescribed search fees must be paid.[27]

 

5.6   PRIORITY OF SECURITY INTEREST

Priority shall be determined by order of registration.[28] The priority of a Security Interest in collateral shall be determined by order of registration while the priority of a Security Interest in Collateral and the proceeds derived from the collateral shall be the same.[29]

A Secured Creditor may transfer a secured obligation notwithstanding any agreement with the Grantor or the Borrower limiting the right to transfer the secured obligation and without having to obtain consent of the Grantor or the Borrower.[30] In other words, transfer does not affect priority.

5.7   REALISATION OF SECURITY INTEREST

In instances where there is a default, a Creditor can exercise his rights under the Act and in the Security Agreement and can also resort to any appropriate judicial remedy.[31]

In a situation where a borrower defaults, the Creditor shall give the Borrower and Grantor a notice of the default and the intention to repossess the Collateral.[32] The notice can be delivered either by hand, courier service, email, registered mail or any other means stipulated in the agreement.[33]

The Creditor may after 10 days of sending the notice of default either take possession of the collateral or render it inoperative.[34] A Creditor can relinquish possession either through a Judicial Process where it was stated in the Security Agreement that possession can occur without a Court Order.[35] In the second instance, the assistance of The Nigerian Police Force can be sought for repossession.

A Creditor who intends to sell a collateral shall in not less than 10 working days before selling the collateral, send Notice to the Borrower, Grantor or any other Creditor who registered a Financial Statement in respect of the collateral.[36] Exception to this is where the Collateral may perish within 10 working days of repossession or the value will decline if not disposed of immediately, or cost of care/storage is large in relation to its value.[37]

A Creditor shall within 15 working days after the sale of a Collateral, give to the person entitled to receive a Notice of Sale , a Statement of Account in writing, stating the amount realized, amount of costs and balance due Grantor.[38]

 

5.8   RIGHT TO REDEEM COLLATERAL

A borrower or Grantor can any time before a Creditor sells the Collateral redeem it by either-

  1. Fulfilling all obligation secured by collateral; and
  2. Payment of any reasonable expenses incurred by the creditor.[39]

At any time before a Creditor sells the Collateral, a Borrower may reinstate the Security Agreement by:

  1. paying the sums owed;
  2. remedying any other default; and
  3. paying a sum equal to the reasonable expenses incurred by the Creditor[40]

Unless otherwise agreed, a Borrower shall not be entitled to reinstate a Security Agreement more than twice in each year.[41]

 

6.0 CONCLUSION

In response to the continual inability of micro, small and medium scale enterprise (MSMEs) to access funds and credit for their businesses, the Governor of the Central Bank in 2015 passed a Regulation called The Registration of Security Interests in Movable Property by Banks and Other Financial Institution in Nigeria Regulation No.1. This later led to the Secured Transactions in Movable Property Bill passed in 2016which eventually snowballed into The Collateral Registry Act enacted by the Acting President, Prof. YemiOsibanjo in May 2017.The importance of the Regulation (and the Law that eventually came off it) is too numerous to count. First, it amongst other things ensures that MSMEs can use personal belongings as collateral for credit/funds for their businesses. With the Enactment of this law, the entire economic atmosphere in Nigeria will be changed positively. Landed properties are no longer the singular acceptable collateral as it was in the obtainable in the past. Any personal article of value can be used as collateral for loan.

However, for a better realistic delivery of the Act, The Credit Reporting Act 2017 was enacted so as to provide for credit information sharing between Credit Bureaus and lenders.

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[1] R.M Goode Legal Problems of Credit and Security (sweet and Maxwell 2nd Edition (1988) p1

[2] Denton Wilde Sapte: A Guide to Project Finance (2000 Edition, pp 68-69)

[3] Moore and Bevins “Security for lending – Pledges, Letters of Hypothecation and Trust Receipt.”

[4] I.O Smith SECURED CREDIT IN A GLOBAL ECONOMY (2003 Edition pg. 271-272)

[5] R.M Goode (Supra)

[6] R.M Goode (Supra)

[7]http://www.mondaq.com/Nigeria/x/32173/Insolvency+Bankruptcy/Enhancing+Nigerias+Economic+Development+A+Case+for+Institutional+and+Regulatory+Reforms+in+Nigerias+Banking+Sector

[8] IBID

[9]]http://www.ifc.org/wps/wcm/connect/Industry_EXT_Content/IFC_External_Corporate_Site/Industries/Financial+Markets/MSME+Finance/

[10]Section 1 Collateral Registry Act 2017

[11] Section 2 Collateral Registry Act 2017

[12] Section 6 of The Collateral Registry Act 2017

[13] Section 10 Collateral Registry Act 2017

[14] Section 11 Collateral Registry Act 2017

[15] Section 12(1) Collateral Registry Act 2017

[16] Section 12(2) Collateral Registry Act 2017

[17] Section 12(3) Collateral Registry Act 2017

[18] Section 13(1) Collateral Registry Act 2017

[19] Section 13(2) Collateral Registry Act 2017

[20] Section13(3) Collateral Registry Act 2017

[21] Section13(4) Collateral Registry Act 2017

[22] Section 15(1) Collateral Registry Act 2017

[23] Section 15(2) Collateral Registry Act 2017

[24] Section 15(3) Collateral Registry Act 2017

[25] Section 22(1) Collateral Registry Act 2017

[26] Section 22(3) Collateral Registry Act 2017

[27] Section 22(2) Collateral Registry Act 2017

[28] Section 23 Collateral Registry Act 2017

[29] Section 24(1) Collateral Registry Act 2017

[30] Section 25(1) Collateral Registry Act 2017

[31] Section 40(1) Collateral Registry Act 2017

[32] Section 41(1) Collateral Registry Act 2017

[33] Section 41(2) Collateral Registry Act 2017

[34] Section 41(3) Collateral Registry Act 2017

[35] Section 41(4) Collateral Registry Act 2017

[36] Section 45(1) Collateral Registry Act 2017

[37] Section 45(2) Collateral Registry Act 2017

[38] Section 47 Collateral Registry Act 2017

[39] Section 49(1)Collateral Registry Act 2017

[40] Section 50(1) Collateral Registry Act 2017

[41]Section 50(1) Collateral Registry Act 2017

By Ann Amaka Nwosu

For- Countryhill Attorneys and Solicitors

 

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Author: chas