INTRODUCTION
The importance of access to affordable credit in any economy cannot be over emphasized, as financing economic activities often requires the use of credit facilities by individual entrepreneurs, corporate entities, small and large scale industries and multinationals, many of which largely source capital by borrowing from banks and other financial institutions.Footnote 1 Furthermore, without access to affordable credit, economic growth, competitiveness and international trade would be stifled, resulting in enterprises being hampered from expanding their ventures in order to reach their full potential.Footnote 2
The Nigerian business landscape is largely dominated by micro, small and medium enterprises (MSMEs),Footnote 3 most of which are often unable to access affordable credit, due to their inability to fulfil the collateral requirements imposed by lenders, who traditionally prefer fixed assets such as land and buildings as collateral for loans. The majority of the assets of most MSMEs comprise intangible and tangible personal property, including inventory and raw goods, industrial and agricultural equipment, durable consumer goods, agricultural products (including crops, livestock and farmed fish), vehicles, bank accounts and accounts receivable.Footnote 4 These assets do not usually meet the requirements imposed by lenders. Indeed it was posited that 99 per cent of movable assets that are acceptable as collateral in the United States would be refused by lenders in Nigeria.Footnote 5 Even in cases where these entities acquire loans secured by movable assets, physical control of the asset is usually preferable, making access to finance the greatest obstacle to business operations in Nigeria.Footnote 6 Of the estimated 37 million MSMEs in Nigeria, only 31 per cent were estimated to have ever obtained loans from local financial institutions (including commercial and micro finance banks), mainly due to the absence of the assets or collateral required by such institutions to guarantee the borrowed funds.Footnote 7
Before the enactment of the Secured Transactions in Movable Assets Act (STMA) in 2017,Footnote 8 there was no harmonized and comprehensive legal and institutional framework to facilitate the use of movable property for business and consumer credit. Instruments such as retention-of-title agreements, conditional bills of sale, hire purchase, equipment leases, customary pledges, fiduciary transfers, equitable charges and letters of hypothecation represented some of the legal instruments used by businesses in Nigeria to secure their obligations by using movable assets as collateral.Footnote 9
This, together with the absence of a dedicated registry for security interests in movable assets,Footnote 10 and general little technical expertise on movable assets lending, contributed to restricted access for MSMEs to affordable debt finance.Footnote 11 This dearth of liquidity has significantly hampered MSMEs’ contribution to economic development.Footnote 12
In a bid to improve financial inclusion and access by MSMEs to debt finance, the Central Bank of Nigeria (CBN) introduced the Collateral Registry Regulations, aimed at stimulating responsible lending to MSMEs by providing a mechanism for the efficient registration of security interests in movable property and the realization of such interests in the event of default.Footnote 13 The Collateral Registry Regulations were subsequently replaced in 2015 by the CBN Regulations on Registration of Security Interests in Movable Property by Banks and other Financial Institutions (CBN Regulations). However, neither set of regulations had the desired impact, lacking legislative backing for effective enforcement and being limited in their scope of application.Footnote 14
Further need for harmonization culminated in the enactment of the STMA in 2017. The STMA replaced the provisions of the erstwhile CBN Regulations and sought to: “(a) enhance financial inclusion in Nigeria; (b) stimulate responsible lending to [MSMEs]; (c) facilitate access to credit secured with movable assets; (d) facilitate perfection of security interests in movable assets; (e) facilitate realization of security interests in movable assets; and (f) establish a collateral registry and provide for its operations”.Footnote 15
The purpose of this article is to consider some of the key changes introduced by the STMA and the resultant impact on the legal framework for secured transactions in movable assets in Nigeria.
EVALUATING THE PRINCIPLES OF THE STMA AND CONSTRUING ITS PROVISIONS
Scope of application
The STMA applies to “all security interests in movable assets created by an agreement that secures payment or the performance of an obligation”,Footnote 16 to persons designated as creditors,Footnote 17 borrowersFootnote 18 or grantorsFootnote 19 under the act.Footnote 20 The STMA further defines movable assets as “tangible or intangible property other than real property” and goods as “tangible movable property, as well as farm products, inventory, equipment, consumer goods, trees that have been severed and oil, gas or minerals that have been extracted”.Footnote 21 However, the scope of the STMA does not extend to “(a) any right of set-off; (b) the creation or transfer of an interest in land other than account receivables;Footnote 22 and (c) any interest created by a transfer, assignment or mortgage in movable property governed by a law for which a registry has been established with regards to ships and aircrafts [sic]”.Footnote 23
Security interests created under the STMA also extend to the “identifiable or traceable proceeds of the collateral, whether or not the security agreement contains a description of the proceeds”;Footnote 24 furthermore, “a security interest created in tangible property before [it was] commingled in a mass or product continues in the mass or product”.Footnote 25 The expansion of the scope of assets that can constitute collateral and form the basis of a registrable interest under the STMA (to include those readily available to MSMEs), as well as the extent of security interests created thereunder, is indeed laudable and will have a significant impact on the financial inclusion of, and access to credit by, MSMEs.
Priority considerations
Under the STMA, the perfection of security interests is effected by the registration of a financing statementFootnote 26 in respect of the security interest at the collateral registry established under the act.Footnote 27 Priority among perfected security interests is determined on the basis of the order of registration, regardless of the date of creation.Footnote 28 This negates the general equitable principle that ranks equitable interests according to the order of their creation (enshrined in the equitable principle that the first in time of creation prevails in the case of similar or equal equities).Footnote 29 It is submitted that this change could lead to injustice for innocent lenders and facilitate unscrupulous practices among lenders who can proceed to register a later interest despite having notice of an existing encumbrance. In any event, this ought to confer a sense of urgency on lenders to ensure immediate registration upon creation.
The STMA vis-à-vis the Companies and Allied Matters Act
A pertinent question, with the promulgation of the STMA, is its effect on the framework for the floating charge, defined under the Companies and Allied Matters Act (CAMA)Footnote 30 as “an equitable charge over the whole or a specified part of the company's undertakings and assets, including cash and uncalled capital of the company both present and future”.Footnote 31
The STMA does not prevent the creation of security interests in the form of charges by companies.Footnote 32 It is submitted that the recognition and retention of charges as a recognizable form of security device available to companies for use under CAMA has, in effect, created a dual legal regime for secured transactions in movable assets, resulting in a parallel legal framework for determining priority in cases of conflicting interests arising from assets filtering across both legal frameworks. This is because parties transacting under one of these legal regimes are not bound by the provisions of the other and, provided the security interest so created complies with the requirements of the relevant regime under which it is created (and to which it is subject), that interest is effective against a third party.
The question then is, how should priority be resolved in respect of transactions involving similar collateral emanating from one system and filtering into another, ie where security is created over the same collateral by the same borrower / grantor in favour of different lenders under each regime? In the absence of a fused registry for security created under either legal framework, a search conducted by a later lender under one regime would not disclose an existing encumbrance created under the other. A further question is then, whether there would be an automatic subordination of the later lender's interest, ie whether the knowledge of an existing interest under a different regime of secured financing would result in the automatic subordination of the later lender's interest.
The general principle of law in determining priority is that interests rank in order of creation. This is founded on two equitable maxims: where there is equal equity, the law shall prevail;Footnote 33 and where the equities are equal, the first in time will prevail.Footnote 34 In Ajayi v Osunuku and Others, the Court of Appeal per Ogunbiyi JCA stated the maxims as follows: “the basic rule of temporal order of priority [is] modified by the maxims in stating that where equities are equal, the first in time ought to prevail; where however there exists both legal and equitable interest, in property, the former would supersede and take over priority over the latter”.Footnote 35
On the basis of the first maxim above, a prior interest created under the STMA will prevail over that created under CAMA, because it amounts to a legal interest under the STMA, while charges are indicated to be equitable interests under CAMA.Footnote 36 It therefore appears that, in cases of conflict between simultaneous transactions under both regimes (regardless of which is created first), interests created under the STMA would probably prevail over those under CAMA, primarily because of the nature of both interests. Typically, legal interests are usually postponed where the holder had actual, constructive or imputed notice of the existing equitable interest.Footnote 37 The Supreme Court in WT Ejuetami v Benedicta Olaiya, per Ejiwunmi JSC stated: “[a] person with a prima facie claim to priority for his interest may lose it through his own misconduct. The owner of a legal interest may be postponed to a subsequent equitable interest owing to his fraud, or by estoppel or through his gross negligence”.Footnote 38
However, a pertinent question is whether only notice apparent under the relevant regime would be considered, or whether notice under one regime can be imputed into the other.Footnote 39 It is submitted in this regard that, in carrying out their due diligence, prudent prospective lenders under either regime should conduct searches at all relevant registries, including those created under different legal regimes. This is because, as a practical matter, in conducting due diligence, searches are typically carried out in all places of record where encumbrances against such assets should be disclosed. In cases of land for example, while the lands registry where the land is located is the major point of reference in identifying relevant encumbrances, it is not uncommon also to carry out searches at the court to disclose whether the land is the subject of litigation. This is done by first running a search against the property in question at the lands registry and obtaining the names of those indicated to have an interest in the land. A written application is then made to the registrar of the relevant court (usually the State High Court having jurisdiction where the land is located) to carry out a search against the names to determine whether they are parties to any pending litigation involving the land. Searches can also be conducted against the records of a company at the Corporate Affairs Commission (CAC) to determine whether the company has created any prior encumbrance over its assets.Footnote 40 This is done by making a written application to the registrar of CAC to carry out a search on the records of the company.
Nevertheless, in failing to create integrated legislation encompassing all consensual types of personal property security interests securing payment or the performance of an obligation (including the fixed and floating charge) and facilitating the continued existence of dual perfection regimes, the STMA has failed to harmonize the secured transactions in personal property framework in Nigeria.Footnote 41 This dual regime, it is argued, will continue to raise issues in secured transactions over movable assets, particularly for priority considerations.
In relation to the enforcement of security interests under the STMA, the STMA confers priority on perfected security interests under the act over a judgment creditor under the Sheriff and Civil Process Act.Footnote 42 Section 34 of the STMA provides:
“Notwithstanding the provisions of the Sheriff and Civil Process Act, a perfected security interest has priority over the rights of an unsecured creditor that has obtained judgment or an order of attachment, unless the judgment creditor, before the security interest is perfected:
(a) Registers a financing statement;
(b) Seizes the collateral; or
(c) Serves a notice of its claim on the third-party holding property for the debtor.”
This has the effect of altering the existing legal regime on the enforcement of judgments generally, and specifically in the context of security interests created in the form of charges under CAMA, the effect being that, upon crystallization of a floating charge and obtaining judgment to enforce, the lenders’ interest may be defeated by a perfected security interest under the STMA, unless any of the conditions precedent above are fulfilled.
Effect on the traditional pledge security
Section 8(2) of the STMA authorizes a secured creditor to take possession of the collateral but stipulates that such possession alone does not operate to perfect the security interest. This provision appears to have watered down the protection afforded to pledgees under pledge agreements and the traditional protection offered by pledge transactions in granting the creditor control over the assets, minimizing fraud by the debtor in adversely dealing with the assets to the detriment of the creditor, and preventing third parties from obtaining interests that are superior to those afforded by possession.Footnote 43
Possession is the fulcrum upon which pledge transactions are founded,Footnote 44 and a pledgee of assets has a right not only to possession of the assets, but also to exclude the pledgor and others from possession; he is said to have “special property” in the assets, permitting him to protect his interest in the assets and enforce his security upon the pledgor's default.Footnote 45 By failing to recognize such possession as sufficient perfection of the secured creditor's interests, and insisting on the registration of a financing statement as a condition precedent to conferring a priority interest, the STMA appears to have removed the protection afforded by pledge transactions, as a pledgee in possession can now have his interest defeated by a third party lender who simply fulfils the registration requirement. By rendering the transfer of possession redundant, the STMA has reduced the pledge to a non-possessory form of security, reduced its attraction for lenders who desire possession as a means of optimizing their interest in the collateral and reduced its overall efficacy in the secured transactions framework. It is further submitted that, except in cases where possession is absolutely essential, such possession imposes more burden than benefit on a creditor, especially considering the legal obligations imposed on pledgees in possession.Footnote 46 Nevertheless, with the expected reluctance on the part of creditors to take possession, the STMA appears to be beneficial to the debtors, having removed the disadvantage of immobilizing the pledged assets and allowing for their continued use in business operations; in this regard it may prove more attractive to MSMEs.Footnote 47
Content of the security agreement / mandatory terms
Undoubtedly, the essence of a valid secured credit transaction entered into by parties to a credit arrangement is the agreement between them as free agents manifesting their genuine intentions in writing.Footnote 48 Accordingly, the STMA sets out mandatory provisions to be included in a security agreement.Footnote 49 Such an agreement is required to: “(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; (e) indicate the tenor of the obligation secured; and (f) confirm the agreement by parties to submit to arbitration, as first recourse in a situation that any civil dispute arises”.Footnote 50 However, the act does not state the effect of the failure of a security agreement to contain any of these mandatory provisions and raises questions regarding the effect of such an agreement. In Fasel Services Limited and Another v Nigerian Ports Authority and Another the court held:
“[T]here is however the need to make a distinction between contracts that are merely declared void and those declared illegal … if the provisions of the law require certain formalities to be performed as conditions precedent for the validity of the transaction without however imposing any penalty for non-compliance, the result of failure to comply with the formalities merely renders the transaction void, but if a penalty is imposed, the transaction is not only void but illegal, unless the circumstances are such that the provisions of the statute stipulate otherwise.”Footnote 51
As the STMA does not provide a penalty for non-compliance with the provisions of the act requiring a security agreement to contain mandatory provisions, such an agreement will be rendered void. It is established law that a void contract is of no effect, binds no-one and is incapable of giving rise to any rights or obligations.Footnote 52 It is therefore imperative for parties to ensure absolute compliance in drafting their security agreements.
Description of collateral in a security agreement or insurance obligation
The STMA deems a collateral description to be complete if it includes the item, kind, type or category, year of manufacture or any other description that can identify the collateral or a statement that a security interest is taken in all the present and future assets of the grantor.Footnote 53 The collateral description is also required to contain a description of the insurance cover on the collateral.Footnote 54 Again, the STMA is silent regarding the consequences of failure to comply with these requirements, and the author notes the argument proffered in the previous section that such failure has the effect of voiding the security agreement and that the parties need to ensure compliance.
It is further submitted, however, that the imposition of compulsory insurance obligations constitutes a burden on MSMEs, irrespective of whose interest is insured, because of the prevalent lending practice of transferring transaction costs to borrowers. A further pertinent issue is the existence or lack thereof of an insurable interest in the future assets of the grantor, ie whether such an interest can be said to exist. A condition precedent to a valid insurance contract is the existence of an insurable interest in the subject matter of the insurance by the insured. Insurable interest has been defined as: “the insured's interest in the subject matter of the insurance which is liable to be adversely or positively affected depending upon whether the subject matter is damaged, lost or preserved”.Footnote 55
It is the “very warp and woof of the enforceability of insurance contracts”,Footnote 56 without which the contract of insurance is null and void.Footnote 57 A valid insurance contract essentially requires the existence of insurable property devolving on the insured and a relationship between the insured and the property sought to be insured.Footnote 58 It is doubtful whether an insurable interest can be said to exist in respect of mere expectancies or future assets; where property, risk or possession has not been obtained in respect of such an asset, no insurable interest exists as to allow its valid insurance. While it is arguable that loss or destruction of the assets may adversely affect the lender's interest, it is further arguable that such risk cannot arise until the actual acquisition of the assets by the borrower.Footnote 59 From a practical perspective as well, it will be difficult for the insurance company to evaluate the value of the future assets and ancillary potential risk so as to assess the premium to impose on it.
An alternative view is that the risk being insured in respect of future assets is the risk of their potential non-acquisition by the borrower; such acquisition is already factored into the projected pool of assets of the borrower at the point the security is advanced. To this extent, particularly considering the loss that the secured creditor would inevitably incur following their non-acquisition, an insurable interest can be said to exist in such future assets so as to constitute valid insurance cover.Footnote 60
In general, section 6(1)(c) of the STMA imposes a burdensome obligation on impecunious borrowers by increasing transaction costs in the form of insurance premiums and may raise further questions as to its tacit affirmation of the creation of security interests in future assets.
Limitation of rights / continued efficacy of negative pledges
Section 4(1) of the STMA reflects the long-established legal principle espoused in the Latin maxim nemo dat quod non habet Footnote 61 by restricting any security interest created by the grantor to the extent of the rights that the grantor has in the collateral, effectively making the grantor unable to confer a better title on a third party than he has himself.Footnote 62 However, section 4(3) provides that “the creation of a security interest in any movable asset is effective notwithstanding any agreement limiting the grantor's right to create such security interest”. The import of this provision is that it permits a grantor to confer a valid title on a third party, regardless of his defective title. Worthy of further consideration is the effect of this section on the general rule conferring priority on a fixed charge over a floating charge, where the holder of the fixed charge had actual notice of the floating charge and the floating charge is coupled with a negative pledge, prohibiting the company from granting any later charge having priority over the floating charge.Footnote 63 This provision appears to have nullified the proviso and may allow the supremacy of the fixed charge notwithstanding prior knowledge of any restriction. It may also reduce the efficacy of negative pledges, common in financing agreements to limit the rights of the borrower to create further security by recognizing security interests created in violation of the agreement. As such, it is even more imperative for lenders advancing credit secured by movable assets to conduct extensive due diligence to discover the existence of any encumbrances and negative pledges.
Establishment of the National Collateral Registry
The STMA established the National Collateral Registry (NCR) in the CBN, with the CBN governor authorized to appoint a registrar to supervise and administer the NCR's operations, and such other staff as may be required to attain the STMA's objectives.Footnote 64 The NCR's functions include to: “(a) receive, register and store information about security interests in movable assets; (b) provide access to persons who may seek information on security interests from the Collateral Registry; and (c) perform such other functions as may be prescribed by regulations made under [the] Act”.Footnote 65
One queries the establishment of the NCR as a unit within the CBN, and the overall role of the CBN in administering the NCR, as opposed to an agency more particularly tasked with facilitating and administering the activities of MSMEs in the country, ie the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).Footnote 66 Alternatively, it would be prudent to consider an agency that already performs a similar role in connection with company charges, ie CAC, authorized under CAMA inter alia to establish and maintain a company's registry and offices in all the states of the federation to discharge its responsibilities.Footnote 67
In any event, it is important that there is coordination between all personal property registries, to allow for the seamless sharing of information to facilitate more effective due diligence searches. It is further proposed that a unitary registration regime be evolved, to encapsulate all secured transactions in personal property.Footnote 68
Stamp duties
The Stamp Duties ActFootnote 69 requires that any document entered into in Nigeria (or entered into outside Nigeria, but relating to a thing done or to be done in Nigeria) be liable to stamping and payment of the applicable stamp duty. The failure to stamp such a document will render it inadmissible in evidence in civil proceedings before a Nigerian court.Footnote 70
Security documents are typically assessed at the rate of 0.375 per cent of the value of the secured sum,Footnote 71 and such costs are typically borne by the borrowers in financing transactions. In a bid to facilitate access to credit by MSMEs and minimize the transaction costs payable, the STMA restricts the application of the Stamp Duties Act and, by extension, stamp duty otherwise payable in respect of security agreements to which secured transactions subject to the STMA are otherwise subject.Footnote 72 Although this reduces the cost implications of such perfection typically borne by borrowers in financing transactions (since the STMA does not prevent the creation and registration of security interests in the form of charges by companies registered under CAMA) in the case of MSMEs incorporated as limited liability companies under CAMA, one queries whether CAC will agree to register the unstamped security documents.Footnote 73
However, in Registrar of Companies v Kehinde,Footnote 74 the court held that the registrar could not refuse to act on the basis of non-compliance with another law, where there was full compliance with company legislation. As such, it is submitted that, to the extent that the requirements of CAMA and companies regulations made thereunder have been complied with, CAC cannot refuse to register a security interest solely on the grounds that the document sought to be registered has not been duly stamped. Notwithstanding the court's decision in Kehinde, it is unlikely, as a matter of company registry practice, that CAC will accept an unstamped security document for the purpose of registering a charge in accordance with CAMA.
Enforcement of security interests
Section 39 of the STMA specifies the remedies open to a secured creditor for the enforcement or realisation of a registered security interest. Specifically, it provides that, a secured creditor, may: “(a) exercise his rights under [the] Act and in the security agreement; or (b) resort to any appropriate judicial remedy”.Footnote 75 These remedies are also stated to be in addition to any other remedy provided in CAMA, including the right to appoint a receiver.Footnote 76 However, as a condition precedent to such enforcement, in the event of default, the creditor is required to provide the borrower and grantor with a notice of default and intention to repossess the collateral and then wait ten days before exercising its right either to take possession of the collateral or to render it inoperative (in appropriate circumstances).Footnote 77
To ease the enforcement process and in recognition of the need for speed in commercial transactions, the STMA permits creditors to exercise their right to repossess collateral without recourse to any judicial process, provided that right is contained in the security agreement.Footnote 78 As such, provided the grantor consents to relinquishing possession without a court order in the security agreement, then the right to repossession can be exercised without such recourse. It is therefore imperative for this to be contained in security agreements.
Assistance of the Nigerian Police Force
The STMA entitles secured creditors to the assistance of the Nigeria Police division within the location of the collateral, in ensuring the peaceful repossession of the collateral.Footnote 79 This appears to be a laudable provision by allowing for ease of enforcement without a lengthy foreclosure process and enhancing the timely enforcement of security and the liquidation of secured assets. More so, as all that is required for such assistance is for the creditor to present the relevant security agreement and duly certified confirmation statement;Footnote 80 no reference is made to a court order. However, the practical implications of the introduction of a criminal law enforcement agency in the form of the Nigeria Police Force in enforcing private commercial transactions raises certain concerns in the context of Nigerian society. These include the possibility of abuse by capricious lenders in oppressing vulnerable MSMEs, and oppression and intimidation by secured creditors. This is also worsened by the exploitative tendencies of the Nigeria Police Force.Footnote 81
RECOMMENDATIONS
The continued existence of a parallel system of secured transactions in movable assets under section 2(3) of the STMA is an impediment to the act's harmonization objectives; it is recommended that it be expunged from the act and that company charges be expressly included under the scope of the STMA and made subject to the extant rules of perfection and priorities. This will assist in the predictability of interests and the outcome of transactions pursuant to such interests. It is further recommended that the provisions of section 8(2) be amended to recognize possession as an alternative means to perfect secured assets and that the efficacy of pledge security interests be reinstated.
Also, the role of the CBN as the key implementer under the STMA and in managing the NCR should be revised, in light of the extant SMEDAN. In the event that charge transactions are subsequently included under the scope of the act, then the NCR can be made a unit of CAC designated for security interests over movable assets, in light of its current role in respect of companies. Such inclusion would further facilitate effective due diligence processes.
Furthermore, the insurance requirements under the STMA should be made discretional or optional, and close monitoring requirements should be mandated in the use of the Nigerian Police Force for repossession, for example by mandating an NCR official to accompany the designated police officers and ensure compliance with due process.
CONCLUSION
The Nigerian business landscape is dominated by MSMEs, the growth of which could enhance economic expansion. The STMA is a step in the right direction in dispensing with the hurdles for these entities to access finance in the form of the scope of collateral, ease of enforcement etc. However, more needs to be done in the area of harmonization, in ensuring a unitary framework for secured financing over movable assets, to dispel issues of priority and general uncertainty arising in respect of assets filtering across both regimes, and in providing requisite comfort to lenders regarding the protection of their interests. It is therefore necessary for the STMA to be reviewed and amended to aid the optimal realisation of the intended objectives of the reform.
CONFLICTS OF INTEREST
None
