November 2017 THE SECURED TRANSACTIONS IN MOVABLE ASSETS ACT: KEY HIGHLIGHTS AND IMPACT ON THE EXISTING LEGAL LANDSCAPE Introduction Access to finance is a vital factor in the growth and development of any economy. World Bank statistics indicate that Nigeria ranks 44 th in the global access to finance index 1 which demonstrates an upward progression from the previous year. More recently, Nigeria moved up 24 places in the World Bank s global ease of doing business index 2, and one of the key areas noted in the report is the Federal Government of Nigeria s drive to expand access to credit for businesses particularly, Micro, Small and Medium Enterprises ( MSMEs ). Arguably, the most significant reform step taken by the FGN to earn this upward move was the passage into law of the Secured Transactions in Movable Assets Act 2017 ( the Act ). In general, the Act provides a broad framework governing the creation of security interests in moveable assets, the rights and obligations of parties to registered security agreements, mechanisms for perfecting security interests in moveable assets, the creation of a national collateral registry and the determination of priority of competing interests in secured assets. Briefly stated, the Act provides legislative imprimatur to the past efforts of the Central Bank of Nigeria ( CBN ) to enhance such enterprises access to debt finance 3. This article presents an analysis of the key provisions of the Act and its impact on secured finance transactions in this market, having regard to the state of play prior to the passage of the Act, particularly, the Bills of Sale Laws applicable in a number of states 4 (in this paper references to the Bills of Sale Law are references to the Bills of Sale Law of Lagos State). Analysis of Key Provisions Scope of Application The Act applies to all security interests in movable assets created by an agreement that secures the repayment of money or the performance of an obligation and applies to all financing and operating leases entered into after its coming into effect. However, the Act does not apply to: (x) any right of set-off; (y) the creation or transfer of an interest in land other than account receivables; and (z) 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 aircraft. 1. Doing Business Report 2017, World Bank, Washington, DC. Accessible at: http://www.doingbusiness.org/~/media/ WBG/DoingBusiness/Documents/Annual Reports/English/DB17-Full-Report.pdf 2. Doing Business Report 2018, World Bank, Washington, D.C. Accessible at: http://www.doingbusiness.org/~/media/ WBG/DoingBusiness/Documents/Annual-Reports/English/DB2018-Full-Report.pdf 3. It is notable that the Act effectively codifies (with few modifications) the provisions of the CBN Regulations on the (registration of security interests in movable property by banks and other financial institutions in Nigeria) 2015 into law. 4. See, for example, the Bills of Sale Law, Chapter B2, Laws of Lagos State and the Bills of Sale Law, page B27, Laws of Ogun State. The Bills of Sale Law provides for the execution and registration of bills of sales within the state and is essentially a reflection of The Bill of Sale Act, 1882 of England which was part of the statutes of general application incorporated into Nigerian law. 1
It is notable that the Act shares a number of similarities with the Bills of Sale Law which affords protection to creditors who have been granted security interests in movable property and personal chattels by way of a bill of sale. Like the Act, the Bills of Sale Law creates a principal registry and establishes a procedure for the registration, renewal and security of bills of sale. However, unlike the Act the Bills of Sale Law expressly excludes debentures issued by a company and secured by its capital stock, goods or chattels in respect of which the Companies and Allied Matters Act (CAMA) would generally apply. The key distinction, therefore, between both statutes seems to be in the scope of application of each statute as the Bills of Sale Law applies to personal chattels as opposed to movable assets under the Act. Personal chattels are defined to include any goods, furniture and other articles capable of complete transfer by delivery, and (when separately assigned or charged) fixtures and growing crops. The definition however generally excludes chattel interests assigned as part of a real estate security bucket, shares and stocks (including government securities), choses in action, and farm produce subject to certain restrictive covenants or customs 5. By contrast, Section 63 of the Act simply defines movable assets as tangible or intangible property other than real property. Given this broad definition, it would appear that the Act is far wider in scope and covers all forms of assets capable of being moved or transferred by delivery. 6 any problems will arise. By contrast, where assets are potentially covered by both statutes, it is presently unclear whether the Act effectively establishes a parallel regime or whether it will be regarded as covering the field sufficiently to preempt or supersede the state law. Effect on Negative Pledges In view of the Act s broad applicability, it is notable that while Section 4(1) of the Act confirms that a security interest shall only be created to the extent of the rights enjoyed by the grantor in the relevant collateral reflecting the application of the nemo dat quod non habet rule, Section 4(3) stipulates 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. 7 The import of this provision is, of course, yet to be tested in court in particular, it remains to be seen how, if at all, this would impact the priority of floating charges over subsequent fixed charges where the holder of the fixed charge had actual notice of a the floating charge, and such floating charge was coupled with a negative pledge. 8 Pending any judicial pronouncement on this point, it may well be that the effect of the Act is to drastically reduce the efficacy of certain negative pledges and other limitations to the creation of further security which are usually included in security documentation. That said, for lenders advancing credit secured by movable assets, it would be prudent to conduct effective due diligence to discover the existence of any prior security and negative pledges. The interplay between two regimes presents some interesting questions. In the case of matters falling outside the Bills of Sale Law, but within the scope of the Act, it is unlikely that 5. Section 3 of the Bills of Sale Law. 6. It would seem that the carve-out of real property includes assets so annexed to the land that they are considered part of the land i.e. fixtures. Such assets, while being capable of movement or transfer by delivery, could be seen as forming part of the land and therefore real property, excluded from the definition of moveable assets above. 7. It should also be noted that Section 4(2) of the Act contains largely similar language in relation to the creation of a secured interest in account receivables 8. Section 179 of CAMA 2
Mandatory Terms The Act also establishes certain minimum provisions which are, as of its coming into force, required to be included in the terms of any security agreement between parties. This provision requires that a security agreement: (a) reflects the intention of the grantor and creditor to create a security interest; (b) identifies the grantor and creditor; (c) describes the secured obligation including the maximum amount for which the security interest is enforceable; (d) describes the collateral adequately; (e) indicates the tenor of the obligation; (f) stipulates arbitration as the first recourse for any civil dispute. 9 The effect of the non-inclusion of these terms is not expressly provided for in the Act, and this raises some uncertainty as to the treatment of a security agreement in which some of these provisions are omitted (deliberately or otherwise). On one view, it may be argued that that a failure to include the mandatory terms prescribed by the Act may result in a failure of the security interest, particularly given that the terms listed above generally mirror those required for the effectiveness of any contract or agreement. However, a better view would be that whether a security interest would indeed fail will depend on the nature of the excluded term. For instance, while it seems unlikely that a failure to provide for arbitration will automatically result in the security interest being treated as invalid under the Act, a failure to evince an intention to create a security interest or to properly identify the parties and the capacity in which they respectively act may be fatal, both in relation to the Act and, for that matter, under the general law of contract. That said, the effect, following promulgation of the Act, of failure to include all these terms in a security agreement is ultimately one for the courts to decide. In the meantime while standard documentation prepared by competent counsel would typically cover all these terms, lenders, especially on smaller financings will need to take care to ensure that these are not inadvertently omitted as the consequences of failure could significantly impact the rights and obligations of the parties, and are likely be especially damaging to the interests of the lender. Treatment of Proceeds Another key provision of the Act relates to its treatment of collateral proceeds. Section 7 of the Act provides that: (a) a security interest shall automatically continue into the identifiable proceeds of the collateral chosen by the parties, whether or not this is expressly stated in the terms of their agreement; and (b) an interest in tangible property which is subsequently co-mingled with other property of the same class or nature shall continue notwithstanding that it now forms part of a mass. While this does not, necessarily, involve a major departure from existing law; the manner in which (b) above in particular, will be interpreted by the courts is worthy of special note. Specifically, questions may be raised as to whether, taken together with (a), the import of (b) is to permit the tracing of the proceeds of the disposal of a secured asset into a comingled mass or products. This was not previously available to secured creditors under the equitable rules of tracing and may, where this approach is adopted by the courts, result in startling outcomes for third parties; particularly purchasers for value without notice who may see their protections under the general law evaporate under the Act. 9. Section 5 of the Act 3
The Collateral Registry The Act also establishes a collateral registry and stipulates that the registry is to essentially: (a) receive, register and store information about security interests in movable assets and (b) provide access to persons who may seek information on security interests from the collateral registry This is similar to the principal registry established under the Bills of Sale Law at which security interests in personal chattels are to be registered. Security interests in movable assets may be perfected by registering a financing statement 10 in respect of that security interest at the collateral registry. Proceeds of collateral which are specifically described in the financing statement or, are in the form of money, accounts receivables, negotiable i n s t r u m e n t s o r b a n k a c c o u n t s, a r e automatically perfected and no further action is required. With respect to the timing and obligation of registration, the Act provides that a financing statement may be registered by or on behalf of a creditor at any time. This suggests that the collateral may be registered at any time. By contrast, under the Bills of Sale Law, the period for registration is 7 days after the making of the relevant bill of sale, while company charges are required to be registered within 90 days of creation. This presents another interesting question. Given that registration at the collateral registry and the principal registry (and the CAC registry) may apply concurrently to a security interest over an asset, it remains unclear whether parties taking security over such assets will need to register their interests at all registries, whether registration at either registry will suffice, or whether the effect of non-registration under the Bills of Sale Law (or CAMA) is blunted by registration under the Act. Priority of Registered Interests Importantly, priority amongst perfected security interests in the same collateral is to be determined on the basis of the order of registration 11. The immediate implication of this is that a security interest which is earlier in time may be defeated by a later interest provided that the latter interest is registered first. Thus, while there is no stipulated timeframe for registration under the Act, the potential loss of priority should provide a strong incentive to lenders to ensure that their interests in the collateral are duly registered as soon as possible after the creation of such interest. Relevantly, a security interest is to have the same priority in respect of all secured obligations and advances, whether existing or future, and a prior interest shall attach to both the collateral itself and any proceeds of disposal thereof. 12 It is, however, unclear at this stage, how the priority rules under the Act will interact with the provisions of other laws which may be applicable to registrable interests in movable assets 13. In particular, the requirements of CAMA regarding the registration of charges over corporate assets and the regime under the Bills of Sale Law are noteworthy. CAMA provides that the effect of nonregistration of registrable charges is that such charges will be void against the liquidator and other creditors of the debtor company. The question, therefore, arises as to whether a creditor whose security interest is perfected under the Act but who fails to register its security interest in accordance with CAMA will nonetheless enjoy the priority assured under the Act or, alternatively, will lose out as a result of the failure to concurrently register its security at the CAC in accordance with CAMA. This issue will be considered in greater detail in later parts of this paper. 10. Section 13 provides that the completion and registration of a financing statement generally requires the consent, in writing of the Grantor to be effective. 11. Section 23 of the Act 12. See Section 24(1) & (2) of the Act although Section 26 of the Act recognises the right of a creditor to agree to the subordination of its interests in favour of another claimant. 4
Assignment Section 25(1) of the Act provides, in effect, that a creditor may assign its rights without the consent of the party granting the security or (where different) the borrower, notwithstanding anything to the contrary stated in the agreement between the parties. While this may be seen as an erosion of the freedom of contract on one hand, it may also be justified as having been designed to facilitate the easy sell-down of loans and accompanying security interests by and amongst lenders. By this section, an assignment in breach of the terms of a provision of the relevant agreement (for example where there is an obligation to obtain consent for such assignment or an absolute prohibition) will nevertheless be effective and leave the assignee in the same position as was enjoyed by the assignor notwithstanding the defects in the mode of assignment. Enforcement of Security Interests With respect to the enforcement or realisation of a registered security interest, Section 39(1) provides that in the case of default, a secured creditor may, inter alia, (a) exercise all its rights under the Act and in the security agreement; or (b) resort to any appropriate judicial remedy. The Bills of Sale Law, on the other hand, does not provide for a [detailed] enforcement regime. The remedies provided in the Act are expressly stipulated to be in addition to any other remedy provided in the Companies and Allied Matters Act. 14 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 possession of the collateral or render same inoperative (in appropriate circumstances). 15 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. 16 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. 13. Section 197 CAMA 14. Section 39(5) of the Act 15. Section 40(3) of the Act 16. Section 40(6) of the Act 5
The Act, the Bills of Sale Law and CAMA: Conflicting or Concurrent Regimes? By Section 51 of the Act, the Act is the applicable law with respect to the creation, perfection and priority of secured interests (x) in tangible property where the asset is located in Nigeria; or (y) in the case of both tangible and intangible property, where the grantor is located in Nigeria 17. This raises questions as to the continued applicability of the Bills of Sale Law in view of the coming into force of the Act. On the one hand, it is tempting, based on the categorical language of Section 51 of the Act, to conclude that the only law governing the creation, perfection and priority of security interests in movable assets is the Act, displacing, one might argue, the provisions of CAMA which, hitherto, governed the registration and priority of charges created by Nigerian corporates. However, in the absence of an express repeal of the relevant provisions of CAMA, it seems equally plausible that the provisions of CAMA remain valid and in force with the effect that non-registration in line with the prescriptions of CAMA may result in adverse consequences notwithstanding that there has been full compliance with the Act. This argument may find support in the fact that the CAC registry is established and widely understood to be the relevant public registry for corporate charges in Nigeria. In the absence of an express statutory repeal or displacement of the registry, and in view of its continued and ongoing use by borrowers, lenders, legal advisers alike, it is difficult to avoid the conclusion that this issue will remain uncertain until determined by a competent court. Given that the collateral register is, unlike the CAC register established under CAMA, not compulsory, a prudent approach (at least until a judgment is handed down to the contrary) would be for lenders to continue registering charges created by Nigerian corporates at the CAC and should treat the collateral registry as affording nothing more than additional protection should it be desired. Having said the foregoing, it is worth noting that the Act contemplates a consolidated electronic database which would cover all key national registries such as the CAC, making available all the relevant registration details to a prospective lender. This could potentially deal with the foregoing concerns, as lenders seeking to register security at the collateral registry would have notice of prior registered security interests at the CAC, and would consequently not enjoy the priority afforded by the Act. However, until this is implemented, lack of clarity as to the interplay between the two registers will continue to be a key risk issue for lenders taking security over movable assets in this market. Stamp Duties The issue of whether registration at the CAC is strictly necessary given the prescriptions of Section 51 of the Act takes on added significance in light of the apparent disapplication of the provisions of the Stamp Duties Act to secured transactions governed by the Act. 18 This provision may, in time, prove to be the most controversial in the entire Act as it appears, at first blush, to effectively remove any requirement to stamp security documents provided that such documents are created, perfected and subsequently registered in accordance with the Act. It should be recalled that the Stamp Duties Act provides that any document entered into in Nigeria (or entered into outside Nigeria, but which relates to a thing done or to be done in Nigeria) is liable to stamping and payment of the applicable stamp duty. The failure to so stamp such document will render it inadmissible in evidence in civil proceedings before a Nigerian court. 19 17. Notably, for the purpose of the Act, a grantor will be deemed to be located in Nigeria where it has a place of business in Nigeria or habitually resides in Nigeria Section 55(1) & (2) of the Act. 18. Section 54 of the Act 19. Section 22(4) of the Stamp Duties Act 6
While Section 54 suggests that security documents registered in accordance with the Act need not be stamped, this view remains untested and may not be accepted by the courts particularly given the emphasis in the current policy climate is to maximise government revenues. In addition, it is unlikely that the CAC will accept an unstamped security document for the purpose of registration of a charge in accordance with CAMA. Thus, a prudent lender seeking to ensure that it is maximally protected may find, until there is a judgment to the contrary, that it is forced to comply with the Stamp Duties Act, the provisions of Section 54 of the Act notwithstanding. CONCLUSION The Act contains many interesting provisions which may have significant and far reaching implications on the rights and obligations of parties to secured transactions involving moveable assets. The statutory establishment of the collateral registry and codification of the rights and obligations of parties is a welcome and long awaited development. However, while the Act and the registration regime it establishes remain in their respective infancies, a number of important uncertainties remain as to the full scope of the Act and its ability to achieve its stated objective of improving access to credit for micro, small and medium sized enterprises. It remains to be seen how significant an impact the new regime will have on MSME access to credit, and how the courts will approach the resolution of the various commercial and legal issues that are likely to arise out of the operation of the Act. For further information, please contact: Yewande Senbore Partner +234-1-2702551 Ext 2715 ysenbore@olaniwunajayi.net Joba Akinola Associate +234-1-2702551 Ext 2710 jakinola@olaniwunajayi.net Adedamilotun Aderemi Associate +234-1-2702551 Ext 2632 aaderemi@olaniwunajayi.net Feyisayo Ogundipe Associate +234-1-2702551 Ext 2634 fogundipe@olaniwunajayi.net www.olaniwunajayi.net Olaniwun Ajayi LP Olaniwun Ajayi LP @OlaniwunAjayiLP With nearly 60 years' experience in helping organizations and individuals achieve their goals, Olaniwun Ajayi LP has a track record of involve ment in some of the largest and most complex transactions in dynamic sectors of the Nigerian economy. Our unparalleled capacity to handle intricate legal issues is the bedrock of our practice, and our clients depend on us to help translate their opportunity into reality 7