OBTAINING LOANS WITH THE USE OF MOVEABLE ASSETS AS COLLATERAL
Having sufficient funds to meet financial demands is not an anomaly. The legal regime on secured credit transactions evolved out of the need to expand capital especially for business Not owners. Traditionally, lands and other immovable properties were required by creditors, as collateral, before parting with their monies to a debtor. Small business owners do not have land to be used as collaterals, thereby limiting their ability to access required capital.
The Federal Government of Nigeria’s drive to expand access to credit for business particularly, Micro, Small and Medium Enterprises, has led to the evolution of the legal framework for access to secured credit, using moveable assets. The establishment of a collateral registry for moveable properties, marked the dawn of a new regime .; coupled with the Secured Transactions in Moveable Assets Act 2017 (“the Act”), to provide the necessary framework.
The Act creates a new type of collateral ( tangible or intangible property other than real property) . The Act excludes transactions where land is used as collateral, or where a party’s right to set-off is used to repay a debt obligation, except a banker’s right of set-off . The Act does not also apply to ships and aircraft.
Highlights of the Act
Being a novel legislation on the use of moveable property as collateral, the Act created innovations that were previously unknown to Nigerian Secured credit jurisprudence. Some of the highlights are:
- National Collateral Registry: The Act established a national collateral registry at the Central Bank , to receive, register and store information about security interest in moveable assets and provide access to persons who may seek information on same .
Priority of Interests: In the event of competing interests over perfected secured interest in the same collateral, priority shall be determined by the order of registration . A perfected security interest under the Act also has priority over the right of an unsecured creditor who has even obtained a judgment or order of attachment (with a singular exception and upon the fulfilment of certain conditions) .
- Tracing of Proceeds: Security interests automatically continue as long as they are traceable and identifiable from the proceeds of the collateral.
- Registration of Financing Statement: Parties to a secured credit transaction are to prepare a Secured Credit Agreement and a Financing Statement. The financing statement is the document to be registered at the Collateral Registry. It is registered on behalf of the creditor with the consent of the grantor/borrower . The Act also requires that for an initial financial statement to be effective, it has to be with the consent of the grantor in writing . An error in the description of the property, the serial number or unique identification number of the financing statement at the collateral registry, would render the financing statement registered ineffective.
- Establishment of a Mediation Panel: The Act establishes a mediation and dispute resolution panel to serve as a first recourse for mediation and settlement over any civil dispute that may arise between the Creditor and the Grantor .
- Perfection of Security Interest: One of the effects of registration under the Act is that when the financing statement has been successfully registered, the security interest is deemed to have been perfected. There is no need to register anywhere else, unlike Land, where Governors consent, registration and stamp duties are required.
- Exclusion from Stamp Duties Act: The Act excludes payment of stamp duties under the Stamp Duties Act for the registration of instruments. This exclusion seems to serve the overall purpose of the Act, which is to stimulate access to secured credit by micro, small and medium enterprises. The exclusion of the stamp duties, removes the financial burden .
- Enforcement: In the event of default, an obligation under the Act can be enforced by the Creditor taking possession or rendering the collateral inoperative. Possession can be taken through judicial means which is by an order of court, or non- judicial means , through the assistance of the Nigerian Police.
Lacuna Under the Act
Inconsistency with other legislation
The Act appears to be in conflict with some of the provisions of the Companies and Allied Matters Act (CAMA). Section 197 (9) of CAMA requires that Debentures should be registered within 90 days. On the other hand, the Act does not state a time frame for registration of securities (which includes debentures). Also, under the Bill of Sales Law, registration of security is to be done within 7 days however, as already stated, the Act states “at any time”.
No timeframe for registration of security interest
The provisions of the Act with respect to the timing for registration provides that a financial statement may be registered by or on behalf of a creditor at any time. This leeway could be exploited. However, a procrastinating Creditor may loose out of the benefits of registration under the Act which includes priority in recovery of the loan, hence the delay is to his own peril.
The wordings of the Act are such that an unsecured Judgment Creditors may run into a brick wall whilst enforcing judgments against Judgment debtors who may have used most of their valuable movable assets as collaterals for loans pursuant to the Act. This is so as the secured creditor’s interest under the Act, takes priority over an unsecured Judgment creditor’s interest.
Non-sanctity of Secured Credit agreement
The creation of a secured interest in any moveable asset is effective, notwithstanding any agreement limiting the grantor’s right to create such security interest. A grantor in a secured credit transaction, may go ahead to create subsequent interests and such would be effective, notwithstanding his agreement with a previous secured creditor not to create subsequent interests.
The Act should be amended to either exclude assets registrable under other legislations( like debentures), or in the alternative, specify a time frame for registration that is in sync with other legislations.
There is also need for sensitization workshops by the Central Bank, to ensure that the class of people meant to benefit from the Act, are aware of its existence and benefits.
In Nigeria, we undoubtedly have departed from the era where ownership of land was a precondition to having access to loan. Although the Act does not make registration under it compulsory, registration is advisable, in other to reap the benefits of registration under the Act.
There are attendant challenges that moveable assets used as collateral may pose. The moveable assets may be destroyed or perish and this may cause reluctance on the part Creditors to accept moveable security. To cater for this, a Fund should be created, to assuage such creditors that may be susceptible to losses. Where this is implemented, the full purport of the Act would be actualized.