THE SECURED TRANSACTION IN MOVABLE ASSETS ACT: PROSPECTS AND PROBLEMS
Introduction-
For any economy of the
world to develop access to finance is very vital. Access to credit is critical
to economic growth and is considered to be the motor for driving private sector
development. However, in Nigeria more than 70% of private enterprises,
typically MSMEs (that is, Micro, Small, and Medium Enterprises), 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. Traditionally, banks only give
loans to businesses that can provide fixed land and property as collateral.
This shuts out MSMEs which usually own only movable assets like motor vehicles
and equipment. To correct this, the Federal Government under the leadership of
President Mohammadu Buhari set up the Presidential Enabling Business
Environment Council (PUBEC) in July 2016. In order to ultimately facilitate the
achievements of the goals of PUBEC, the Secured
Transaction in Movable Assets Act was passed into law in 2017.
Otherwise called “The Collateral Registry Act.†this Act
ensures that Micro, Small and Medium Enterprises (“MSMEsâ€Â) in Nigeria can
register their movable assets such as motor vehicle, equipment and accounts
receivable in the National Collateral Registry, and use same as collateral for
accessing loans. This in turn will increase their chances at accessing
financing and tackle one of the major obstacles faced by MSMEs.
In general, the Act
provides a wide framework which governs the creation of secured interest in
movable assets and several factors incidental to it. Succinctly stated, the Act
provides legislative imprimatur to the past efforts of the Central Bank of
Nigeria (“CBNâ€Â) to enhance such enterprises’ access to debt finance.
Scope
of Application
The Act applies to all
security interests in movable assets created by an agreement that secures
payment or the performance of an obligation[1]. It also applies to a
person who is a creditor, borrower or grantor[2]. It however does not apply
to any right of set-off, or the creation or transfer of an interest in land
other than account receivables, nor 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 ship and aircraft.[3]
It should be remembered
that the Bills of Sale Law[4] is already in existence
which affords protection to creditors who have security interests in personal
property by way of a bill of sale. A bill of sale is a written instrument
showing the voluntary transfer of a right or interest or title to personal
property, either by way of security or absolutely, from one person to another
person or persons without the actual physical possession of the property
leaving the owner and being delivered to the other party.
It is apparent therefore
that the Act shares some similarities with the Bills of Sale Law; the
difference being in the scope of application of the two statutes. Whereas the
Bills of Sale Law applies to ‘personal chattels’ the Act deals primarily with
‘movable assets.’
Moreover, the provisions
of the Bills of Sale Law are only applicable to debtors who are private
individuals as opposed to corporate persons under the Act. Thus, creditors who
deal with debtors who are corporations or limited liability companies can not
avail themselves of the protection of this Law. This is because relief against
debtors who are corporate persons or limited liability companies is already
provided for in the Companies and Allied Matters Act which requires that all
legal debentures – as opposed to Bills of Sale – must be registered at the
Corporate Affairs Commission before they can be recognized as registered
collaterals.[5]
It should be noted that
the provisions of the Act do not prevent the creation of security interest in
the form of charges by Companies registered under the Companies and Allied
Matters Act. This thus, raised the question of, which of the statutes should
take priority with respect to their respective provisions on the creation of
charge by corporations. This question will be adequately dealt with in the
course of this article.
Creation
of Security Interest
The Act provides in section 3 that a security interest
shall be created by a security agreement between a grantor and creditor. Thus,
where the asset falls into the category of the collateral description in the
Security Agreement or the Security Agreement extends the security interest to
the grantor’s present and future asset, a security interest is automatically
created.
Note also that creation
of a security interest in any movable asset is effective notwithstanding any
agreement limiting the grantor’s right to create such security interest[6]. The import of this
provision is, of course, conflicting with the Companies and Allied Matters Act
which provides that where the terms on which a floating charge was granted
prohibited the company from granting any later charge having priority over the
floating charge and the person in whose favour such later charge was granted
had actual notice of that prohibition at the time when the charge was granted
to him, a fixed charge shall not have priority over such floating charge[7]. It is an obvious
disregard of that part of that section of CAMA. It remains to be seen how the
court would reconcile this grey area.
Mandatory
Terms and Contents
The Act also establishes
certain minimum provisions which are, expected to be included in the terms of
any security agreement between the parties. These provisions require the
security agreement to: (a) reflect the intention of the grantor and creditor;
(b) identify both the grantor and creditor; (c) describe the secured
obligation; (d) describe the collateral adequately; (e) indicate the tenor of
the obligation secured; and (f) confirm the agreement to submit to arbitration.
The Act however does not
state the effects of omitting any of the stated provisions. On one view, it may
well be argued that failure to include any of the mandatory terms may result in
a failure of the security interest. However, a better view is to consider the
importance of the term excluded. For instance, it may be right to say that
exclusion of the term requiring arbitration does not have the same effect or
weight as omitting to reflect the intentions of the parties or identifying
them.
The
Collateral Registry
The Act in section 10 provides for the
establishment of the National Collateral Registry which functions include to
receive and store information about security interests in movable assets and
provide access to persons who may seek information on security interest from it[8]. This is similar in
structure and functions to the Bills of Sale Registry established under the
Bills of Sale Law. The registry is located in the Central Bank and the Governor
of Central Bank is responsible for the appointment of a Registrar and such
other staff as may be required for the attainment of the objectives of the Act.
The
Financing Statement
The creditor is required
to register the financing statement which must be duly consented by the
Grantor, otherwise it becomes ineffective[9]. The financing statement
must contain description of the collateral and other relevant information. It
must also sufficiently describe the Grantor and the creditor[10]. An error in the unique
identification number of the Grantor or the serial number of the collateral
that causes the registration not to be retrieved in a search renders the
financing statement ineffective[11]. An error in other
information such as the name or address of the Grantor; the maximum amount for
which the security interests may be enforced; or the name or address of the
creditor does not render the registered Financing Statement ineffective[12].
A registered financing
statement may be amended by a creditor upon the registration of an amendment
financing statement.[13] Note that where collateral
described in a registered financing statement is transferred and the secured
creditor registers an amendment financing statement adding the transferee as a
new grantor within 15 days after the secured creditor becomes aware of the
transfer; the security interest shall retain its perfection and priority[14].
The financing statement
may be cancelled upon the filing of a cancellation statement by a creditor
within 15 working days of receiving a request for cancellation from the Grantor
or the Borrower after the performance of all obligations and no commitment to
make future advances.[15]
Priority
of Security Interests:
Priority between
perfected secured interests on the same collateral shall be determined by order
of registration[16].
This implies that a creditor who secures interest on the collateral after
another creditor would have priority over the first secured creditor if he
registers first. This is in accordance with the equitable maxim which says where equities are equal the first in time
prevails. The first in time in this case is the registered interest.
Similarly a secured
creditor may transfer a secured obligation without having to obtain consent of
the Grantor or the Borrower.[17] This
is however, notwithstanding any agreement with the Grantor or the Borrower
limiting the right to transfer the secured obligation. This certainly is not
too good in the light of sanctity of contract. Sanctity of Contract is a
general idea that once parties duly enter into a contract, they must honour
their obligations under the contract. A contract is a contract and ought to be
kept by parties to it (pacta sunt
servanda). Even if the parties to a contract are legally excused from
performance of the terms agreed upon, it can only be by consent of the parties.
It is thus difficult to justify this provision of the Act in the light of its
breach of this important principle of contract.
Furthermore, the Act
recognizes some claims which take priority over a perfected security interest.
These are (1) a financial institution’s right of set-off which is prioritized
over a perfected security interest that extends to a deposit account[18]; (2) a transferee of
funds from a deposit account or cash other than from a deposit account takes
the funds or cash free of a security interest unless the transferee acts in
collusion with the Grantor or the Borrower in violating the rights of the
Creditor[19].
Similarly, a lien arising
out of materials or services provided in the ordinary course of business in
respect of goods that are subject to a security interest shall have priority
over that security interest[20].
A holder of a negotiable
instrument or title document who gave value and acquired the negotiable
instrument or the title document without knowledge that the transaction is in
breach of the security agreement to which the security interest relates also
shall have priority over a perfected security interest in the negotiable
instrument or the title document[21].
It is equally important
to consider the provision of Section 34 which
stipulates that a perfected security interest has priority over the rights of
an unsecured creditor that has obtained a judgment or an order of attachment,
unless the judgment creditor takes certain steps such as registration of a
financing statement; seizure of the collateral; or service of a notice of its
claim on the third party holding property for the debtor. Note that this is
notwithstanding the provisions of the Sheriff and Civil Process Act. Even though
the so-called ‘unsecured creditor’ may not have a charge created on the
collateral it may be correct to say that by virtue of the court judgment
obtained in his favour attaching the debtor’s property a charge has been
created on the collateral all the same. But it may still be necessary that the
judgment creditor registers a financing statement in the light of the rule as
to priority of competing secured interests contained in Section 23.
Rights
and Duties of Parties
The Act requires that all
parties must act in good faith and in accordance with reasonable commercial
standard[22].
Where therefore a person fails to discharge a duty or obligation imposed by the
Act, the other party shall have a right to recover damages for any loss or
damage[23].
Realization
of Security Interest
In case of default, the
creditor may exercise his rights under the Act and in the Security Agreement or
else resort to any appropriate judicial remedy[24]. The creditor must
however give notice of the default and intention to repossess the collateral to
the borrower and the Grantor[25]. It is only 10 days after
sending the notice of default that the Creditor may then either enter into
possession of the Collateral or render the Collateral inoperative without
taking possession[26].
Note that the remedies
available under the Act are in addition to those available under the Companies
and Allied Matters Act.[27] It appears that the
drafters of the Act intended to drastically reduce (though not eliminate) the
role of the court in the enforcement of security interest in movable assets.
This is clearly deducible from the fact that the Act provides alternative means
of enforcing a security interest without judicial process. Thus, where the
Grantor consented to relinquishing possession without a court order in the
Security Agreement, the Act permits that the creditor may repossess a
collateral[28].
The provision that a
creditor may request for assistance from the Nigerian Police having authority
within the location of the collateral for the peaceable repossession of the
collateral is innovative[29]. It however remains a
matter of time to see if this would yield a positive result, or rather lead to
abuse cumulating into public nuisance.
The
Mediation and Dispute Panel (“the Panelâ€Â)
There is established
under the Act a Mediation and Dispute Panel[30]. The Panel handles first
hand any civil dispute which arises between the creditor and grantor in the
course of implementing the Act. The CBN Governor is responsible for issuing
guidelines that will set out the modalities and regulate the functioning of the
Panel[31]. It is however not
certain the jurisdiction of the Panel. The Act in Section 5(f) stipulates that part of the contents of the security
agreement is the agreement by parties to submit to arbitration as first recourse
in a situation that any civil dispute arises. It however fails to provide for
the penalty of omitting this. Therefore, a better view is to say that the
jurisdiction of the Panel depends on the agreement of the parties.
Redemption
of Collateral
At any time before a
creditor sells the collateral, the Borrower, Grantor or the other creditor may
redeem the collateral by fulfilling all the obligations secured by the
collateral or payment of any other reasonable expenses incurred by him[32]. The Act gives priority
over any other person’s right of redemption the Grantor’s right to redeem[33]
Conflict
of the Act with CAMA and Stamp Duties Act
Section
51 provides
that the law applicable to the creation, perfection and priority of a security
interest in tangible property when the tangible asset is located in Nigeria is
the Act. Also if the tangible asset is of a type ordinarily used in more than
one country, the Act equally applies if the Grantor is located in Nigeria. At
the same time the Act is the law applicable to the creation, perfection and
priority of a security interest in an intangible asset when the Grantor is
located in Nigeria.
The authoritative tone of
Section 51 has the consequence of
relegating other statutes like the CAMA
and Bills of Sale of Law to the
background. By declaring itself as the only applicable law, it is not certain
the position of CAMA which hitherto governs the creation, registration and
priority of charges created by corporations in Nigeria. One may be tempted to
conclude that the Act is a deliberate attempt at overriding the provisions of
CAMA on the creation of charges by corporations, while canvassing the argument
that, like the Bills of Sale Law, the Act ought to have been focused on debtors
who are individuals and leave corporate debtors to be taken care of by CAMA.
Suffice to say that the
Act does not expressly repeal the provisions of CAMA on this subject. In fact,
some sought of recognition is given to CAMA when the Act states that the
remedies available under the Act are in addition to those available under the
Companies and Allied Matters Act[34]. In the light of this,
the provisions of CAMA on creation of charges by corporations still subsist.
Since CAMA is the paramount statute governing the operations and activities of
companies in Nigeria, the better bet is for creditors seeking a charge on a
company’s asset to follow the registration procedure as laid out in CAMA and
only consider those under the Act as additional protection.
Thus a person dealing
with a corporate debtor, may be exposing himself to greater risk if he fails to
perform the requirements of CAMA, as the perfection of security interest in
movable assets under the Act may not avail him.
Another important statute
which the Act conflicts with is the Stamp
Duties Act[35].
The Act stipulates expressly that the provisions of Stamp Duties Act shall not
apply to any secured transactions subject under the Act[36]. Note that the Stamp
Duties Act provides that every document entered into in Nigeria or entered into
outside Nigeria which relates to a thing done or to be done in Nigeria must be
stamped after payment of the applicable stamp duty. Thus, the Act expressly
excluding the provisions of the Stamp Duties Act from applying to any secured
transaction subject to the Act creates confusion in the mind of a lender as to
what he should do to be maximally protected.
Although, there is no
court pronouncement on it yet, it is almost certain that a document not duly
stamped in accordance with the Stamp Duties Act will not be accepted in evidence
in civil cases. Moreover, it may not be sufficient to protect the purported
secured interest of the lender. It is therefore advisable that a lender stamps
the document evidencing his security interest in movable assets,
notwithstanding the provision of the Act. It is trite principle of law that it
is better to err on the surplus.
Conclusion
The secured transaction
in movable assets Act came into existence as a legislative effort to increase
access to credit facilities by micro, small and medium enterprises (MSMEsâ€Â) in
a bid to ensure economic development. The Act in all its ramifications, serves
as a wider framework for secured interests in movable assets. It provides for
the rights and duties of the creditor, borrower and grantor, how this type of interest
may be created, and also establishes a registry (The National Collateral
Registry) to be in charge of the secured transaction. The Bill which eventually
became an Act was signed by the Acting President of Nigeria, Prof. Yemi
Osinbanjo SAN in 2017. With passage of the Act, the existing Central Bank of
Nigeria (CBN) Guidelines regulating the operations of the National Collateral
Registry has now been replaced by formal legal frameworks. However, while the
establishment of the Act is laudable, there exist a number of uncertainties
which are associated with it. It is yet to be seen how these various commercial
and legal issues which attend the Act will be judicially resolved by the court.
ABOUT
THE AUHTOR
Taiye Vincent Adegoke is a double degree holder of Law and History and International Relations from the University of Ibadan and Obafemi Awolowo University, Ile-Ife respectively. He is also a double First Class graduate of the University of Ibadan and the Nigerian Law School. Taiye is a budding politician, entertainer and a lover of God. He was the Public Relations Officer of the University of Ibadan Students' Union between 2013 and 2014. Taiye has published several articles in his name and has co-authored many. You may reach him via taiyevincentadegoke@gmail.com
[1] Section 1(a
[2] Section 1(b)
[3] Section 2 of Secured Transaction in
Movable Assets Act
[4] Reference to Bills of Sale Law here
is Bills of Sale Law of Lagos
[5] Section 197 of CAMA. The section
however does not prejudice any contract or obligation for repayment of the
money thereby secured, and as such when a charge becomes void under this
section, the money thereby secured shall immediately become payable.
[6] Section 4(3) of the Act
[7] Section 179
[8] Section 11
[9] Section 12 and 13
[10] Section 14
[11] Section 16
[12] Section 17(1)
[13] Section 19(1)
[14] Section 20
[15] Section 21(1) – (2).
[16] Section 23.
[17] Section 25.
[18] Section 29(1).
[19] Section 29(1). A transferee of cash
for the purpose of this section however does not include a bailee. (Sub-section
3.)
[20] Section 30.
[21] Section 31.
[22] Section 35.
[23] Section 36.
[24] Section 39(1).
[25] Section 40(1).
[26] Section 40(3).
[27] Section 39(5).
[28] Section 40(4).
[29] Section 40(5) and (6).
[30] Section 41(1).
[31] Section 41(3)
